IRS Postpones Implementation of Digital Payment Reporting Changes:

What Small Businesses Need to Know

by First Class Compliance on January 18, 2024

In a recent development, the IRS has decided to delay the implementation of a rule change for the second consecutive year, impacting tax filers who receive business income through payment apps and online marketplaces like Venmo, CashApp, Etsy, and Airbnb. This decision aims to address concerns about potential taxpayer confusion and ensure a smoother transition for all parties involved.

Current Reporting Rule for 2023 Taxes:

For the 2023 tax year, the existing reporting rule still applies. Third-party payment platforms, also known as third-party settlement organizations, must report gross business income to both the taxpayer and the IRS in January if the individual conducted over 200 business transactions on the platform and earned more than a total of $20,000 from them. A business transaction is defined as a payment for a good or service, including tips. It does not include personal transactions, like your friend paying you for their share of dinner.

Rule Change for 2024:

Originally enacted under the American Rescue Plan of 2021, the upcoming rule change will require third-party platforms to issue a 1099-K if the taxpayer made more than $600 in annual business income over one or more transactions. However, the IRS announced a phased-in approach for tax year 2024. Instead of the $600 threshold, platforms will only be required to issue a 1099-K if business transactions exceed $5,000. This approach allows the IRS to review operational processes and address taxpayer concerns.

Impact on Tax Burden:

The key difference is that, once the rule change takes effect, the IRS will receive information about business income directly from third-party payment platforms. This enhances the IRS visibility into your businesses finances and makes it more challenging for individuals to underreport their income.

Looking Ahead:

The delay in implementation offers members of Congress, including Senators Sherrod Brown and Bill Cassidy, an opportunity to devise a permanent, bipartisan solution to the rule. The Coalition for 1099-K Tax Fairness, comprising entities like Airbnb, PayPal, and Etsy, views this delay as a victory for common-sense tax policy.

Conclusion:

Regardless of the evolving regulations, small businesses, freelancers, and gig workers should remain vigilant about maintaining their records to legally reduce their tax obligations. The phased-in approach for 2024 provides a transition period for all stakeholders to adapt to the upcoming alterations in the digital payment reporting landscape, and that includes you.