How to prepare your business for the 1099-K changes

This blog has been updated; it was originally published in December 2023.

A much-anticipated 1099-K reporting threshold change for online marketplaces and payment apps will come into effect for calendar year 2024. However, the change won’t be as big as initially planned. 

Instead of plummeting from $20,000 and 200 transactions to $600 and any number of transactions, as it was supposed to do for tax year 2022, the IRS is phasing in the 1099-K reporting threshold reduction for third-party settlement organizations (TPSOs) such as Airbnb, eBay, Etsy, PayPal, and Venmo. 

On November 26, 2024, the IRS announced that TPSOs must report transactions when the amount of total payments for those transactions is:

• More than $5,000 for 2024
• More than $2,500 for 2025
• More than $600 for calendar year 2026 and beyond

Some members of Congress are seeking to restore the higher reporting threshold. Of three bills introduced in January 2023, the Saving Gig Economy Taxpayers Act has gained the most traction. If enacted, it would return the 1099-K threshold to $20,000 and 200 transactions.

• What is a 1099 form? 
• What happened to the 1099-K under the American Rescue Plan of 2021? 
• Are businesses prepared for the 1099-K changes?
• How can companies be ready to send out all these 1099 forms?

An IRS 1099 form is a tax form that documents payments to a business, individual, or entity that isn’t an actual employee. The payer is responsible for filling out the appropriate 1099 form and sending copies to the payee, the IRS, and where required, the state taxing authority. 

There are different 1099 forms for different types of payments. The IRS currently lists 21 different 1099 forms, from the Form 1099-A (Acquisition or Abandonment of Secured Property), to the Form 1099-SB (Seller’s Investment in Life Insurance Contract). Most forms must be sent to all necessary parties by January 31 of each year.

The Form 1099-K reports non-W-2 income received during the year from one of two types of reportable payment transactions:

1. Payment card transactions (credit, debit, or stored value cards such as a gift card) 

2. Third-party network transactions (payment apps or online marketplaces, including third-party payment settlement organizations)

This includes payments for personal items sold, goods sold, services provided, or property rented through online marketplaces, auction sites, ticket exchange or resale sites, peer-to-peer payment platforms or digital wallets, and more. 

Form 1099-K made headlines whenthe American Rescue Plan Act of 2021 significantly lowered its reporting requirements. 

The American Rescue Plan (ARP) dramatically lowered the 1099-K reporting threshold for third-party settlement organizations. 

Prior to the enactment of the ARP, online marketplaces, payment apps, and payment card companies were required to file a Form 1099-K with the IRS and provide a copy to any business, individual, or entity that earned over $20,000 in aggregate payments and had 200 such transactions in a calendar year. The ARP drastically cut that threshold to more than $600, period.

The 1099-K reporting threshold was scheduled to drop to $600 for tax year 2022, but in December 2022, the IRS delayed implementation of the 1099-K changes due to the magnitude and impact of the change.

In November 2023, the IRS said it would treat 2023 as an additional transition year to “reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation.”

Then in December 2023, the IRS said it would phase in the $600 threshold because of “the complexity of the new provision and the large number of individual taxpayers affected.” The 1099-K threshold would be $5,000 for tax year 2024. 

No further guidance was provided until November 26, 2024, when the IRS announced the cascading thresholds of $5,000 for 2024, $2,500 for 2025, and $600 for 2026 and beyond.

When the interim $5,000 threshold takes effect, millions of marketplace sellers, gig workers, and occasional sellers who have never seen a 1099-K will receive a 1099-K from a payment app like PayPal, Square, and Venmo or an online marketplace like Amazon, eBay, and Etsy. Millions more taxpayers will receive a 1099-K whenever the threshold drops to $600.

Are businesses ready for the 1099-K changes? To find out, Avalara commissioned Censuswide to survey gig workers, marketplace sellers, and decision makers at online marketplaces. The survey was conducted in late October 2023, when the $600 threshold was still imminent. 

Nearly 90% of the marketplaces surveyed said their sellers are prepared for the 1099 changes.

Most of the polled marketplaces have taken steps to help their sellers with the new reporting requirements. Three-quarters (75%) of respondents have “informed and advised sellers,” and 59% have “informed sellers.”

Yet while 87% of the online marketplace sellers and gig economy workers surveyed said they’re aware of the upcoming changes to IRS Form 1099-K reporting of digital payments, including the new income threshold of $600, just 51% of those surveyed say they’re “aware and prepared” for the upcoming changes. Another 19% are “aware but not prepared.”

Perhaps that’s why 78% of marketplace sellers and gig workers surveyed reported being concerned about the upcoming changes to the 1099-K reporting requirements. Of those, about 49% are “very concerned” and 29% are “somewhat concerned.”

Though marketplace facilitators have worked to educate their sellers about the upcoming 1099 form changes, the $600 threshold will likely take a toll. About 83% of the surveyed marketplaces anticipate sellers to drop from the platform as a result of the 1099-K compliance issues. For their part, 55% of marketplace sellers and gig economy workers surveyed said these new 1099-K rules will impact their decision to continue on-demand work or selling on marketplaces. 

Indeed, 64% of marketplace sellers and gig economy workers surveyed are considering alternatives to gig work/online selling as a result of the compliance requirements and tax implications of the new 1099-K rules. Another 16% said it’s “too early to determine.” Only about 21% of the surveyed marketplace sellers and gig economy workers said the upcoming changes will not impact their decision to continue on-demand work or marketplace selling.

Whether feeling prepared or unprepared at this time, marketplace facilitators, marketplace sellers, gig workers, and other taxpayers who will be affected by the threshold change now have more time to put their ducks in the proverbial row. 

That’s a good thing, because the number of 1099-K forms submitted to the IRS is expected to jump from 14 million to 44 million once the threshold drops to $600.

Cloud-based automation solutions that scale with a business’s needs can help online marketplaces and third-party payment processors comply with the additional reporting requirements that will result from the lower 1099-K threshold. 

And indeed, a majority of online marketplaces (65%) surveyed by Censuswide plan to deliver 1099-Ks via a “1099 automated solution.” However, about 47% plan to send them out “manually, using internal teams,” and close to 42% plan on “outsourcing to a firm.” Respondents could select more than one answer and so may be planning to use more than one delivery method.

Avalara 1099 & W-9 can help both businesses and accounting professionals streamline management of 1099-K forms. It allows you to store vendor and freelancer information, import 1099 payee data, and transfer vendor details for a quick turnaround, while automatically checking for errors. 

“Our survey reveals the need for proactive measures on the part of marketplace sellers, on-demand workers, and online marketplaces to determine how best to comply with a revised 1099-K digital payments threshold,” says Scott Peterson, VP of Government Relations at Avalara. He suggests affected businesses seek advice from a bookkeeper or a tax or accounting professional before making big decisions related to 1099 compliance.

Survey methodology

Marketplaces: The research was conducted by Censuswide, with 106 decision makers over the age 18 in online marketplaces (eBay, Etsy, Amazon, etc.) in the U.S. (job titles: Accountant, Bookkeeper, Vendor manager, Controller) between 10.20.2023 – 11.1.2023. Censuswide abides by and employs members of the Market Research Society, which is based on the ESOMAR principles.

Marketplace sellers and gig economy workers: The research was conducted by Censuswide, with 501 sellers on online marketplaces and gig economy workers (freelancers, contractors, side hustles, etc.) in the U.S. The research was run between 10.20.2023 –11.1.2023. Censuswide abides by and employs members of the Market Research Society, which is based on the ESOMAR principles.