App payment confusion causes IRS to delay $600 sales reporting threshold — again

Taxpayers and gig workers who use apps such as Venmo and Paypal to make money selling personal goods and services don’t have to worry about the new $600 threshold for reporting sales on form 1099-K to the IRS this year.

Confusion about the new rule among taxpayers and payment companies, along with operational problems relating to unnecessary paperwork, have once again caused the agency to delay the requirement, initially passed in 2021 as part of the American Rescue Plan (ARP).

The threshold for tax year 2023 will remain at $20,000 and more than 200 transactions, the same as it was last year, IRS officials told reporters Tuesday. Next year, the IRS expects to enforce a $5,000 limit as a transitional threshold on the way down to the $600 required by law.

The ARP originally required apps and online marketplaces such as eBay and Ticketmaster to report payments of more than $600 for the sale of goods and services on a Form 1099-K starting in 2022. The forms then get sent to taxpayers and the IRS.

But people are having trouble differentiating between sales made for personal commercial gain, which are taxable, and payments made to friends and family for personal expenses and transfers, which are not, officials said. 

“The Form 1099-K could be sent to anyone who’s using payment apps or online marketplaces to accept payments for selling goods or providing services. This includes people with side hustles, small businesses, crafters and other sole proprietors,” the IRS said in a Tuesday statement. “However, it could also include casual sellers who sold personal stuff like clothing, furniture and other household items that they paid more than they sold it for.”

“Reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K,” the IRS says.

There’s also confusion about what to do if items are sold at a loss, which shouldn’t be taxed but can still generate forms to be sent out to taxpayers, leading to a potential mess of paperwork.

“Selling items at a loss is not actually taxable income but would have generated many Forms 1099-K for many people with the $600 threshold. This complexity contributed to the IRS decision to delay the additional year to provide the agency time to update its operations to make it easier for taxpayers to report the amounts on their forms,” the agency said.

Taxpayers selling items at a loss are supposed to “zero out” the payment by reporting it on both their tax return and on Form 1040, Schedule 1. 

“This will ensure people who unnecessarily get these forms don’t have to pay taxes they don’t owe,” the IRS said.

The office within the IRS that advocates on behalf of individual taxpayers and households welcomed the delay in the rule change.

“Taxpayers and tax professionals need certainty and clarity about what is expected of them. By announcing its plans for this year and next year now, the IRS is taking steps to provide it,” taxpayer advocate Erin Collins said in a statement.

Collins stressed the scope of the announcement, saying the updated 1099-K reporting requirements only apply to third party payment services.

“It’s important for taxpayers to understand that today’s announcement applies only to reporting requirements imposed on third parties. If income is taxable, taxpayers have been and continue to be required to report it on their tax returns. Nothing about the Form 1099-K reporting dates changes that,” she said.

Officials said the agency has the authority to unilaterally make these changes in implementing the law, citing “broad discretion” provided by the Internal Revenue Code in administering the tax law.

They did not give an estimate of how much additional revenue the government is expected to receive as a result of the lowered threshold.

In order to be compliant with the $600 threshold, which was supposed to take effect this year, companies offering payment apps and sales platforms have been asking customers for their personal tax information, leading to some distress.

The IRS is in the middle of the largest overhaul to its daily operations in decades, a result of an initial $80 billion funding boost to be spent over the subsequent decade as a provision of the 2022 Inflation Reduction Act.

That funding increase has since been scaled back by about $20 billion a result of Republican opposition, but the operational overhaul is continuing. Further cuts to the additional funding could bear out as part of the appropriations process next year, as well.

The overhaul includes an online tax filing system that could effectively replace many pieces of private software designed to help people file their taxes. The system is set to debut in 2024 with a pilot program.

“The IRS will explore providing taxpayers the option to file certain tax returns directly with the IRS online,” the agency said as part of its strategic operating plan for the funding boost.

—Updated at 3:35 p.m.