The Internal Revenue Service (IRS) has recently provided another round of transition relief for third-party settlement organizations (TPSOs) such as Venmo, PayPal and CashApp. 

This is a key change that may impact your 2024 and 2025 freelance tax filing. Until now, the IRS was set to start scrutinizing business-related transactions and the income derived from them on third-party payment platforms more closely in the 2024 tax year with a much lower reporting threshold of just $600 and a requirement that these companies report on a 1099-K Form. This change was delayed previously in 2022 until 2023. This new transition relief once again delays the changes as detailed below. 

Currently, the reporting threshold applies when a taxpayer completes more than 200 business transactions per year, exceeding an aggregate amount of $20,000. Note that this does not apply to personal transactions between friends or family members for incidental, personal purchases.

This relief is particularly significant for transactions occurring during the calendar years 2024 and 2025. Here's an in-depth look at the changes, their implications, and what freelance business owners need to know to ensure compliance.

Overview of the Transition Relief on 1099-K Reporting for TPSO Transactions

The new compliance adjustments to the reporting thresholds for Form 1099-K, which is used by TPSOs to report payments made to merchants and service providers. Under the new guidelines, TPSOs will report transactions as follows:

For calendar year 2024: Transactions totaling more than $5,000.

For calendar year 2025: Transactions totaling more than $2,500.

For calendar year 2026 and onwards: Transactions totaling more than $600.

This phased approach provides a buffer period for TPSOs to adapt to the new reporting requirements, ensuring they can manage the transition effectively and maintain compliance. For businesses using TPSOs, it means that more of the taxable income from these transactions will be sheltered from mandatory IRS reporting.

The gradual lowering of the reporting threshold marks a significant shift from previous requirements. Previously, TPSOs were required to report transactions exceeding $600, effective immediately. However, the new phased thresholds allow TPSOs more time to prepare for the comprehensive reporting requirements that will become mandatory in 2026. This adjustment aims to ease the administrative burden on TPSOs and allows for a smoother transition to the new thresholds.

Tips for Freelancers on Navigating Changes to 1099-K Reporting Related to TPSOs

Now that you're aware of the changes to 1099-Ks affecting freelancers, here are some tips to help you with your 1099 reporting:

1. Report All Freelance Income: Regardless of the source, all freelance business income must be reported on your tax return. For example, if you receive payments labeled as “goods and services” from one or more third-party settlement organizations totaling $600 or more, you'll receive a 1099-K. These apps have specific accounts to identify transactions for goods and services, and only those labeled as such will be considered for the 1099-K form.

2. Include All Income: Ensure that you report all income on your freelance tax return unless it is legally exempt. This includes income documented on Form 1099-NEC (Nonemployee Compensation), Form 1099-K, or any other information return.

3. Estimate and Pay Taxes: Don’t forget to account for income from third-party payment platforms when making your estimated tax payments at the federal, state, and local levels. You must pay taxes on earnings from TPSOs throughout the year, either through withholding or estimated tax payments. If you have a W-2 job or pension and the withholding for those incomes isn't enough, you will need to make additional estimated tax payments.

4. Track All Income: Accurately tracking and reporting all your income, including from TPSOs and other sources, is crucial. This will not only help protect you in the event of an audit but also provide the most accurate financial picture for planning the year ahead.

Ensuring that you have all of your taxable income from TPSO sales and other sources as well as all of your tax documentation in order now will give you a head start on assessing your specific tax obligations for 2024 as you prepare to file your taxes. It is also important to monitor these and other changes as you plan ahead for 2025. Check with a tax professional if you have questions or are unsure of your filing and reporting requirements for this and other tax issues.