This article will attempt to cut through some of the confusion surrounding Form 1099-K. This form has been in the news since 2022, with the reporting threshold being a moving target ever since. And now, the One Big Beautiful Bill (OBBB) has re-set the threshold back to what it used to be.
What is Form 1099-K?
Form 1099-K is issued in situations involving payment card transactions and third-party settlement organizations (TPSO).
Easy for me to say. What does this mean?
On payment card transactions, think of a business that accepts credit cards. They almost certainly have a merchant processor in the background, actually handling that transaction. This merchant processor will send a 1099-K to the business at the end of the year, showing all of the money taken in by credit cards and debit cards during the year.
For TPSOs, think of places such as Venmo and PayPal, and platforms such as Etsy. Places that facilitate transactions and hold the money in the middle, is how I like to describe it.
What about bill-pay services? Typically, bill-pay services are not TPSOs. Bill.com now has a payment option to vendors which falls under the heading of TPSO, so sometimes bill.com will issue a 1099-K to the vendor. Otherwise, bill-pay services (including bill.com) facilitate ACH transfers to vendors, which is not a Form 1099-K situation.
As for reporting thresholds: there is no threshold for payment card transaction reporting; any dollar amount would be reported on a 1099-K. For TPSOs, they’ll only issue a 1099-K if the recipient hits both of these thresholds: more than 200 transactions processed on the TPSO and more than $20,000 received via the TPSO (this has moved around in recent years; more later).
Issuing 1099-NEC or 1099-MISC
Before we go further, and to help you understand Form 1099-K and some of the controversies around it, let’s talk about Form 1099-NEC and Form 1099-MISC. (And you know you’re pumping your fist and saying “YESSS, I was hoping he’d say that!”)
Businesses that pay merchants by credit card or debit card don’t issue a 1099. Businesses that pay contract labor using a TPSO don’t issue a 1099-NEC.
The regulations under Section 6041 (think of those as general 1099 rules) and 6041A (specific to contract labor) both say, if a transaction is subject to reporting under both Section 6041 or 6041A and 6050W (6050W = Form 1099-K), the transaction is reported under 6050W (i.e. on a 1099-K).
Example: your business pays rent to your landlord using your corporate credit card. This payment is subject to Section 6050W (i.e. 1099-K). Thus, you don’t need to issue a 1099-MISC.
Trivia: who issues the 1099-K? Whoever the landlord is using behind-the-scenes as the processor of the transaction. All of the landlord’s credit card receipts for the year are included on the 1099-K.
More trivia: there is no dollar threshold for the merchant processor; they’ll issue a 1099-K for any dollar amount processed.
Payments made through a TPSO are more complicated – you must determine:
- Is it a payment for goods or services? (So, contract labor….) And then….
- Did you mark “goods and services” when making the payment? (Or, depending on the app, did you pay through the contractor’s business profile?)
What about paying rent or something other than contract labor via a TPSO? Your author believes those would be subject to 1099-K reporting if you are given the option to pay through the landlord’s business profile on the app. If you’re not given that option (which means you must mark “goods and services” in order for the 1099-K rules to apply), it wouldn’t be subject to 1099-K rules – you shouldn’t mark goods and services because it’s not a good or service that you are paying for.
Both the law and regulations under Section 6050W make no mention of goods or services when referencing payment card transactions. This indicates that any transaction could be reported on a 1099-K. But when talking about TPSOs, the law and regulations consistently say “goods and services.” There’s a reason why this distinction is important.
Why This is Important
So let’s talk about why this is important. If a transaction might be reported on a 1099-K, the payer doesn’t issue a 1099.
Think of our example of using a credit card to pay rent to the landlord. The business doesn’t report that transaction in box 1 of Form 1099-MISC, because it’s subject to being reported on a 1099-K.
If you make a payment of goods and services via a TPSO, you don’t issue a 1099. Realistically, “goods” purchases are not reported at all on the payer side, so really we’re looking at “services” — contract labor.
Example: You owe That Guy $1,000 for contract labor. You pay him through his business Venmo account. You do NOT send him a 1099-NEC for this transaction. Instead, the 1099-K rules apply and Venmo (might) send him a 1099-K. Regardless of whether or not he gets a 1099-K from Venmo, you do not have a reporting obligation.
The 1099-K Problem
The Affordable Care Act created Section 6050W, and set a reporting threshold for TPSOs of both more than $20,000 received and more than 200 transactions processed.
In 2021, the American Rescue Plan Act (aka the 3rd COVID stimulus bill) called for a change to the TPSO threshold, setting a $600 threshold for 2022 (with no transaction threshold).
This caused a great deal of uproar, and the IRS was not ready for the influx of forms, so the IRS kicked the can back on this several times. And now we have the OBBB which has kicked the threshold back to ACA levels.
Here is the history of the threshold.
- 2011-2021: more than $20,000 received and more than 200transactions
- 2022: proposed to change to $600 as per the American Rescue Plan, but the IRS decided to keep the threshold at $20,000 and 200 transactions.
- 2023: the IRS kept the threshold at $20,000 and 200 transactions again.
- 2024: $5,000 with no transaction count.
- 2025 before OBBB: $2,500 (and changing to $600 in 2026)
- 2025 as per OBBB: back to $20,000 and 200 transactions.
Here’s the TPSO problem:
That Guy has 25 business clients, each paying him $10,000 for the year, so $250,000 total. If payment is made by check, or through a place such as bill.com or Zelle, the paying business would issue a 1099-NEC, and all $250,000 gets reported to the big bad IRS. But if payment is made through a TPSO, and the payment is made through the contractor’s business profile or the payer marks “goods and services,” the payer doesn’t issue a 1099-NEC; instead 1099-K rules apply.
Following the thread: the TPSO issues a 1099-K if the recipient of money crosses both of these thresholds: more than $20,000 received and more than 200 transactions.
Well, That Guy received $250,000 from the TPSO (way more than $20,000) but he only processed 25 transactions (way less than 200 transactions). Meaning, Venmo won’t issue a 1099-K. And, the regulations also say the paying business doesn’t need to issue a 1099-NEC.
While That Guy “should” report all of his income honestly, we know what happens sometimes in the real world in this situation. People often wrongly assume that if there’s no reporting form, then there’s no need to report the income (this is wrong, by the way). The Treasury Inspector General has studied this issue: https://www.oversight.gov/sites/default/files/oig-reports/202130002fr.pdf
Other Perspectives
I talk a lot about 1099s (I’ve been teaching on 1099s for over 13 years). When talking about this subject, I often just reference the “That Guy” example and his $250,000 of income with no reporting form issued. And I maintain that I am 100% right to bring this up, as well as my criticism of tax pros who fanned the flames of hysteria around the ARPA proposal to change the 1099-K threshold.
But there is more to consider, including some perspectives on why lowering the threshold might not have been good, even if it would have picked up more transactions.
More on these perspectives, in Part 2.