After a few years of delays, the reporting threshold for third party settlement organizations (TPSOs) reported on a Form 1099-K has officially dropped in 2025. This significant change, which is not the only one affecting Forms 1099-K this year, could affect various kinds of tax situations in ways your clients might not expect.
What is the function of a Form 1099-K?
A Payment Settlement Entity (PSE) must file Form 1099-K annually to report payments made through payment card or third-party network transactions. A PSE:
- Includes merchant acquiring entities (like banks) that process credit/debit card payments.
- Includes TPSOs like payment apps that handle transactions between buyers and sellers.
- Does not include healthcare networks, in-house accounts payable departments, and automated clearinghouses.
A payment card includes credit, debit, or stored-value cards (e.g., gift cards), provided through an established card network. Anyone who receives payments via a payment card or from a TPSO is considered a participating payee.
While it is a reporting form, Form 1099-K does not specify how or whether the reported amounts should be taxed. It simply reports payment activity.
What are the new lowered reporting thresholds for Form 1099-K in 2025?
The IRS has implemented phased reductions in the reporting thresholds for TPSOs, which include payment apps and online marketplaces:
- 2024: TPSOs must report payments exceeding $5,000.
- 2025: The threshold decreases to $2,500.
- 2026 and beyond: A further reduction to $600.
This gradual decrease means more taxpayers will receive Form 1099-K.
What is the scope of Form 1099-K?
In addition to the threshold change, the scope of Form 1099-K has also expanded. The form is issued by payment settlement entities to report:
- Payments made via credit, debit, or stored-value cards.
- Payments settled through third-party networks exceeding the specified thresholds.
It’s essential to note that Form 1099-K reports gross payment amounts without accounting for adjustments such as fees, refunds, or discounts.
What is the impact on gig workers and online sellers?
Individuals engaged in gig work or online sales should be particularly vigilant. Even if income falls below the reporting threshold, all earnings must be reported on tax returns. The lowered thresholds aim to capture a broader range of income, emphasizing the importance of accurate record-keeping.
Are personal transactions subject to reporting requirements?
The IRS distinguishes between business transactions and personal payments. For instance, money received from friends or family as a personal gift or reimbursement is not subject to Form 1099-K reporting. However, payments received for goods or services sold are reportable and taxable.
Let Drake Software make your final push the easiest part of tax season.
Still looking for tax preparation software? It’s not too late to make the switch. Watch Drake Tax in action with a free trial or contact our Sales team for more information.
Note: For detailed information on Form 1099-K and its requirements, refer to the IRS guidelines.