IRS phases in Form 1099-K threshold at $2,500 in 2025

The Internal Revenue Service extended its transition relief Tuesday for the new Form 1099-K information reporting threshold, setting it at $5,000 for 2024 and $2,500 in 2025 before reaching the statutory level of $600 in 2026 and thereafter.

The threshold applies to payment apps and online marketplaces such as Venmo, PayPal, eBay, Etsy, StubHub, Airbnb and more, also known as third-party settlement organizations. The American Rescue Plan Act of 2021 lowered the old threshold from $20,000 and 200 transactions per year to $600 as a way of collecting more taxes from people and businesses who receive payment through these third parties.

Many taxpayers and tax professionals had worried the lower threshold would prompt a flood of 1099-K forms arriving in the mail for people who had never been subject to the requirement, prompting the IRS to repeatedly delay the requirement. Last November, the IRS began phasing in the lower threshold at $5,000 for calendar year 2024. Now it is setting the threshold at $2,500 for next year by issuing Notice 2024-85 on Tuesday.

Lawmakers in Congress have complained that the IRS has been overstepping its authority by setting its own thresholds, but legislation to repeal the $600 threshold has not yet passed in Congress. IRS commissioner Danny Werfel has defended the IRS's authority to phase in the new threshold, as it has done for other parts of the Tax Code that have provoked resistance.

Al Drago/Bloomberg

"There are a variety of examples throughout history where the IRS — to protect taxpayers from undue burden or from potentially being overtaxed — where we have either delayed implementation or ramped implementation," said Werfel during a congressional hearing in February. "This is not the first time and I'm not the first commissioner that has confronted this tension."

The head of Congress's main tax-writing committee, House Ways and Means Committee chair Jason Smith, R-Missouri, blasted the IRS's move to once again phase in the threshold. "The Biden-Harris Administration acted unlawfully to save Democrats from the political fallout of this policy with another delay of what their own law called for and has now gone even a step further outside the bounds of what their law says by creating a new $5,000 threshold," he said in a statement Tuesday. "With this new scaled phase-in the IRS has decided they will put Democrats' 1099-K policy on a delayed timer that will fully detonate in the middle of Donald Trump's second term in office."

Under the guidance issued Tuesday, third-party settlement organizations will be required to report transactions when the amount of total payments for those transactions is more than $5,000 in 2024; more than $2,500 in 2025; and more than $600 in calendar year 2026 and after. Notice 2024-85 also says that for calendar year 2024, that the IRS will not assert penalties under section 6651 or 6656 for a TPSO's failure to withhold and pay backup withholding tax during the calendar year.

TPSOs that have performed backup withholding for a payee during calendar year 2024 must file a Form 945 and a Form 1099-K with the IRS and furnish a copy to the payee. For calendar year 2025 and afterward, the IRS said it will assert penalties under section 6651 or 6656 for a TPSO's failure to withhold and pay backup withholding tax.