IRS delays rule change on digital payment reporting for small businesses and side hustles

new York
CNN
—

For the second year in a row, the IRS has decided to postpone the implementation of a rule change that would affect filers who receive business income for their goods and services through payment apps and online marketplaces like Venmo, CashApp, Etsy and Airbnb, among others.

This change could have resulted in an additional 44 million 1099-K forms being sent in January to these filers, including small business owners, self-employed individuals, those with side hustles and gig workers.

In explaining why it is delaying implementation again, the IRS cited concerns about potential taxpayer confusion and the need to make it easier for all parties to comply with the change.

“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear that we needed more time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel. “We want to make this as simple as possible for taxpayers. We will work to make the new reporting requirements easier for them, and we will work closely with third-party groups, tax professionals and others to find the simplest path to ensuring compliance with the law.

For this tax year, the reporting rule that has been in force for years still applies.

Third-party payment platforms – also known as third-party settlement organizations – must report your gross business income to you and the IRS in January only if you have made more than 200 business transactions on that platform and earned more than a total of $20,000 from them.

A commercial transaction is defined as payment for a good or service, including tips. This doesn’t include personal transactions, like your friend paying you their share of dinner. Or for the money you send to your child to pay for their expenses.

(If you end up getting a 1099-K error, either because your business transactions didn’t exceed this year’s thresholds or because the form reflects personal monetary transactions, check out this IRS page to learn how to correct the situation ).

The rule change, which was passed as part of the 2021 American Rescue Plan, will eventually require third-party platforms to issue you a 1099-K if you earned more than $600 in annual business income on one or several commercial transactions.

But the IRS said Tuesday that for tax year 2024, rather than applying the $600 threshold, it would “phase in” the change and only require third-party platforms to issue you a 1099-K if your commercial transactions exceed $5,000.

“This phased approach will allow the agency to review its operational processes to better address taxpayer and stakeholder concerns,” the IRS said.

The Electronic Transactions Association, which is pushing for a higher threshold, welcomes the IRS’s delay and its incremental approach. “We applaud this,” ETA spokesman Scott Talbott said.

Regardless of the delay or rule change, your tax obligations remain the same

Neither the postponement of the rule change nor its possible implementation will in any way change your tax burden.

That’s because you have always been obligated, as a taxpayer, to report the money you earn from your business activities to the IRS.

The difference once the rule change takes effect is that the IRS will know your business’s income from a third-party payment platform. This will make it more difficult for someone to evade the taxes they owe if they are tempted to under-declare what they have earned.

And this change will effectively raise the curtain on the amount of commercial revenue generated by third-party payment platforms.