1099-K Reporting Threshold Changes: What CPAs Need to Know for 2025 and Beyond

The 1099-K reporting threshold is dropping in phases from $20,000 to $600 — the lowest it has ever been. For the 2025 tax year (returns due April 2026), third-party settlement organizations (TPSOs) were required to issue a 1099-K to any payee who received more than $2,500 in payments, regardless of transaction count. In 2026 — the current tax year — the $600 statutory threshold takes effect for the first time. For CPAs, this means a material increase in information returns arriving for clients who have never seen a 1099-K before, significant reconciliation complexity, and elevated CP2000 risk from clients who fail to report or misclassify the income. The adjustment required is not to the law; it is to your client communication, intake workflow, and return preparation process.

Legislative History: How the Threshold Fell from $20,000 to $600

The original TPSO reporting requirement, established under IRC §6050W, set the threshold at $20,000 in gross payments and more than 200 transactions in a calendar year. Both conditions had to be met before a TPSO — PayPal, Venmo Business, Cash App for Business, Square, Stripe, Airbnb, eBay, Etsy, and similar platforms — was obligated to file a 1099-K with the IRS and furnish a copy to the payee.

The American Rescue Plan Act of 2021 (ARPA, P.L. 117-2) amended IRC §6050W effective for transactions after December 31, 2021, eliminating the 200-transaction test entirely and replacing the $20,000 dollar threshold with $600. The intent was to improve compliance for gig economy and marketplace income — a segment the IRS identified as a significant tax gap contributor (IRS Tax Gap Estimates for Tax Years 2014–2016, IRS Publication 5364).

The IRS then spent three years issuing transition relief rather than implementing the statutory change immediately:

• Notice 2022-48: Treated 2022 as a transition year; TPSOs could apply the old $20,000/200 standard.
• Notice 2023-74: Extended transition relief through 2023; same treatment.
• Notice 2024-85: Established a phased implementation — $5,000 for 2024, $2,500 for 2025, $600 for 2026 and beyond.

The phase-in is now complete. The $600 threshold applies to payments received in calendar year 2026, which means 1099-Ks reflecting that threshold will begin arriving in January 2027. However, the 2025 return season — happening right now — is the first year where the volume of 1099-Ks is materially higher than pre-ARPA norms, and many clients are seeing these forms for the first time.

The Phase-In Schedule and What It Means for Current Returns

For the 2025 tax year returns you are preparing now, the applicable threshold was $2,500. Any client who received more than $2,500 in aggregated TPSO payments during 2025 should have received a 1099-K — regardless of whether those payments represented business income, resale of personal property, family expense splitting, or any other transaction type.

Note that payment card transactions — credit card, debit card, and payment card networks — have always been reportable with no threshold under IRC §6050W(a). The threshold changes affect only TPSOs, not card network issuers.

What Is and Is Not Taxable Income on a 1099-K

A 1099-K arriving in a client's mailbox does not mean all of those amounts are taxable income. This is the most common client confusion point and the primary driver of CP2000 notices in this area.

Taxable income reported on a 1099-K includes:

• Gig economy earnings (rideshare, delivery, freelance platforms)
• Business sales of goods or services (Etsy sellers, eBay dealers, Amazon marketplace vendors)
• Rental income received through platforms (Airbnb, VRBO)
• Any other payment received for services or goods sold in a trade or business

Amounts appearing on a 1099-K that are not gross income include:

• Personal property sold for less than the original purchase price — a personal sale at a loss is not taxable, but the client must be able to demonstrate basis (IRS Notice 2023-74, Q&A 7)
• Gifts or reimbursements mistakenly processed through a TPSO (splitting dinner, repaying a friend for shared expenses)
• Return of capital or insurance reimbursements

The IRS introduced a new Form 1099-K reporting adjustment line on Schedule 1 (Part II, Line 24z — "Other adjustments") specifically to allow filers to offset 1099-K amounts that are not includable in gross income. Clients who simply receive a 1099-K and don't report or adjust it will trigger the Automated Underreporter (AUR) system — the same system that generates CP2000 notices — because the IRS sees reported gross payment amounts that don't appear anywhere on the return.

For clients with gig economy income, the interaction between 1099-K and 1099-NEC forms requires careful handling — see the gig economy tax reporting guide for the full reconciliation workflow. Note that the OBBBA raised the 1099-NEC threshold to $1,000 effective 2026 — the same year the 1099-K threshold drops to $600 — creating a gap where payments between $600 and $999 may generate a 1099-K but not a 1099-NEC. See 1099-NEC and 1099-MISC thresholds for 2026 for the full implications.

Client Communication and Intake Adjustments

The practical effect of the lower threshold is that clients who have never discussed their platform income with you — and who may not think of it as "taxable" — are now receiving forms that will match against their return. Your intake process for 2025 returns should include explicit questions about:

1. Platform payment receipts: Did the client receive payments through PayPal, Venmo, Cash App, Square, Stripe, or any marketplace platform? Even personal use of these platforms can trigger a form if aggregated gross payments exceeded $2,500.
2. Marketplace sales: Did the client sell items on eBay, Facebook Marketplace, Etsy, or Amazon? Both business inventory and personal property appear on these forms.
3. Rental payments: Did the client receive rent payments through Zelle, Venmo, or a rental platform?
4. Documentation of basis: For any items sold on a marketplace, can the client provide original purchase receipts or cost basis records? Without documentation, a non-taxable personal sale becomes very difficult to defend on audit.

The document retention guide covers what records clients should be keeping for personal property sales specifically — update your client-facing retention checklist to add marketplace transaction logs and purchase receipts for items routinely sold online.

Reconciliation Workflow for 1099-K Forms

For each 1099-K a client receives, follow this reconciliation approach:

Step 1 — Identify the source. Is this a business TPSO (Stripe, Square) or a personal platform (Venmo, PayPal)? Business-source 1099-Ks typically go on Schedule C. Mixed-use platforms require transaction-level review.

Step 2 — Categorize each payment. Business income, cost-of-goods offset (resale), non-taxable personal sale, gift/reimbursement, or return of capital. The client's bank statements and platform transaction history are the source documents.

Step 3 — Calculate reportable income. For business income: gross receipts minus cost of goods sold and expenses go on Schedule C. For non-taxable amounts: document the offset on Schedule 1, Line 24z with a description that identifies the nature of the adjustment.

Step 4 — Verify the 1099-K amount. TPSOs report gross payment amounts, which may include refunds, chargebacks, or returned transactions that reduced actual receipts. Compare the 1099-K total to platform transaction records — discrepancies should be documented and the return should reflect the correct net figure with an explanation.

Step 5 — Flag for estimated tax adjustment. Clients who now have meaningful platform income and are making quarterly estimated payments should have their payment schedule reviewed — new 1099-K income that wasn't previously reported may require higher quarterly payments to avoid underpayment penalties.

CP2000 and Audit Risk Management

The expansion of 1099-K reporting is a direct driver of increased CP2000 volume. The IRS AUR system matches information returns against filed returns automatically. When a 1099-K appears in the IRS's system but the client's return shows no corresponding income — and no offsetting adjustment — the AUR generates a proposed adjustment.

The mitigation strategy is straightforward but requires consistent execution:

• Never omit a 1099-K. Even amounts the client believes are not taxable must be addressed on the return — either reported as income or explicitly offset with a documented adjustment.
• Document non-taxable amounts contemporaneously. Basis records for personal property, screenshots of reimbursement transactions, and gift documentation should be collected during intake and retained in the client file.
• Use the Schedule 1, Line 24z adjustment correctly. The IRS expects to see this line used for non-taxable 1099-K amounts. A bare offset without description increases notice risk; a clear description ("Personal property sale, original cost $X, sold for $Y — no gain") reduces it.

The audit triggers and defense guide covers information return matching as a high-risk DIF score contributor — mismatched 1099-K amounts are one of the most reliable triggers in the current examination environment.

Frequently Asked Questions

Does a 1099-K create taxable income automatically?

No. A 1099-K reports gross payment volume processed through a TPSO or payment card network — it is not a determination of taxable income. Personal property sold at a loss, gifts, and reimbursements may appear on a 1099-K without being includable in gross income. The client must report the 1099-K amount and use the Schedule 1 adjustment line (or Schedule C) to reconcile the taxable portion.

What if the 1099-K amount is wrong?

Contact the TPSO to request a corrected form. If the TPSO cannot correct in time for filing, document the discrepancy in the client file, report the correct taxable amount on the return, and retain records showing the basis for the discrepancy. Do not report an incorrect amount simply because it matches the 1099-K.

Do Zelle and Venmo personal-use transactions get reported on a 1099-K?

Zelle is a bank-to-bank transfer network and is explicitly not a TPSO under IRC §6050W — Zelle does not issue 1099-Ks. Venmo and PayPal are TPSOs and do issue 1099-Ks, but only for business accounts or business-designated transactions. Personal transfers (labeled as such within the platform) are excluded. However, if a client uses Venmo or PayPal to collect rental income or sell goods without correctly designating transactions, those payments may aggregate into the business threshold.

How does the 1099-K threshold affect clients who sell personal items on eBay?

If a client sold personal-use items on eBay for more than $2,500 in 2025, they likely received a 1099-K. If the items sold for less than the original purchase price, there is no taxable income — but the client must be able to document original cost. If the items sold at a gain (collectibles, appreciated property), that gain is reportable as capital gain income.

Will clients owe self-employment tax on 1099-K income?

Only if the income reflects ongoing trade or business activity. A one-time sale of personal property does not constitute self-employment income. Regular, profit-motivated selling activity — the eBay "business" that a client insists is just a hobby — is self-employment income subject to SE tax and Schedule C reporting. The hobby loss rules under IRC §183 add another layer of analysis when clients have consistent losses from platform activity.

What documentation should clients keep for marketplace sales?

Original purchase receipts or credit card statements showing acquisition cost, date of purchase, and description of the item. For items without receipts, a contemporaneous written record of estimated fair market value at purchase (with supporting evidence where available) is better than nothing — though it will not withstand strict scrutiny. Platform transaction histories showing sale date, sale price, and any fees are automatically available from most platforms and should be downloaded annually.

What is the difference between a 1099-K and a 1099-NEC for gig workers?

A 1099-NEC reports nonemployee compensation paid directly by a business to an individual — wages paid outside of payroll, freelance fees, or contractor payments over $600. A 1099-K reports aggregate payment volume processed through a TPSO or card network. A client who drives for Uber may receive both: a 1099-K from the payment platform and a 1099-NEC from Uber for certain incentive payments. Both amounts feed into gross income, and double-counting must be avoided.

What happens if a client ignores a 1099-K they receive?

The IRS's AUR system will match it. If the gross amount on the 1099-K does not appear anywhere on the filed return — as income, as an offset, or as part of a Schedule C total — the system generates a CP2000 notice proposing additional tax on the full unmatched amount. Responding to a CP2000 requires documentation, time, and often professional representation fees that exceed the tax at issue. Proactive reporting is always less expensive than reactive defense.

How Arvori Helps

Arvori helps CPAs and their clients stay ahead of compliance changes like the 1099-K threshold rollout — tracking information return obligations, flagging reconciliation gaps, and surfacing documentation requirements before filing season. Learn more about Arvori.