In Notice 2024-85 (published November 26, 2024, the Notice), the IRS confirmed that filers of Form 1099-K, Payment Card and Third Party Network Transactions, should use a $5,000 threshold to determine which payees are reportable for calendar-year 2024 transactions. It also introduced a $2,500 threshold for calendar-year 2025 transactions.

According to the Notice, calendar-year 2025 will be the "final transition period" for changes to IRC Section 6050W, which were enacted as part of the American Rescue Plan (ARP) Act of 2021. The Notice further states that the IRS will not impose information return or payee statement penalties under IRC Sections 6721 or 6722 for failing to report payees who receive less than the announced thresholds.

EY observes: Each of those penalties would have been $330 per form ($660 total) for 2024 and $340 per form ($680 total) for 2025.

In addition, the Notice shines a bright light on the issue of backup withholding for TPSOs. While providing penalty relief for calendar-year 2024 related to backup withholding, the Notice specifically comments on when withholding is required without clarifying the IRS's position on whether certain liabilities may have accumulated in prior calendar years.

ARP changes to IRC Section 6050W

Generally, third-party payment networks are payment services or marketplaces that accept payments from buyers of goods and services and pass on those payments to the merchants, as well as meeting certain other requirements. The central organization on the network that is generally responsible for issuing Form 1099-K is the TPSO.

Before the ARP, the reporting threshold for third-party payment network transactions was a two-pronged test; it required that the payee both receive more than $20,000 and conduct more than 200 transactions on the network. The ARP amended IRC Section 6050W to require TPSOs, starting with 2022, to issue Forms 1099-K if a payee receives $600 or more in payments in settlement of third-party network transactions, with no minimum threshold for the number of transactions required to trigger reporting.

EY observes: IRC Section 6050W also requires Form 1099-K reporting for payment card transactions, beginning with the first dollar paid, but ARP did not alter those provisions.

The IRS delayed implementing the $600 threshold for third-party payment network transactions through Notices 2023-10 and 2023-74, maintaining the $20,000/200 transaction threshold for calendar-years 2022 and 2023 (see Tax Alerts 2023-0028 and 2023-1929). On November 21, 2023, in conjunction with Notice 2023-74, the IRS issued a press release and fact sheet stating that it was "planning a threshold of $5,000 for 2024 to phase in the new law."

After certain members of Congress objected to the additional delay, the March 2024 instructions to Form 1099-K referenced the $600 threshold and did not mention the planned $5,000 threshold. Doubts about the $5,000 threshold persisted until the publication of Notice 2024-85, which now provides certainty on the $5,000 threshold for calendar-year 2024 transactions.

Backup withholding

Under Notice 2011-42, published shortly after the enactment of IRC Section 6050W, backup withholding was not required until after a payee exceeded 200 transactions. Noting that Notice 2011-42 was intended to be "interim guidance," Notice 2024-85 now specifically deems Notice 2011-42 to be obsolete. In describing itself as interim guidance, Notice 2011-42 also stated that Treasury and the IRS intended to amend the regulations to incorporate the 200-transaction rule. "Until the amended final regulations are published," Notice 2011-41 stated that "TPSOs may rely on this notice to limit any backup withholding obligations to payees who have exceeded the 200 transaction threshold." TPSOs generally have relied on Notice 2011-42, as the IRS explicitly said they could do, but the regulations were never amended.

Notice 2024-85 refers to Treas. Reg. Section 31.3406(b)(3)-5 for the proposition that TPSOs should impose backup withholding on third-party payment network transactions "without regard to the statutory monetary or transactional thresholds found in section 6050W … . Accordingly, under the regulations, TPSOs are required to obtain a TIN from every payee in a third party payment network, even the occasional small volume seller, to avoid backup withholding." The Notice specifically provides penalty relief under IRC Sections 6651 and 6656 for calendar-year 2024 for failure to timely make backup withholding deposits and pay the associated liability but does not provide relief for the actual backup withholding liability.

EY observes: The IRS's go-forward position seems clear: backup withholding is required whenever a TPSO makes a payment if it has not obtained the payee's TIN, or alternatively properly established the foreign status of the payee. Accordingly, TPSOs that previously waited to request TINs from US payees until the payee approached its 200th transaction should instead request TINs before the first transaction, and institute backup withholding until the TIN is received.

On the other hand, the IRS's position on backup withholding liabilities before the Notice's publication is less clear. The Notice may be read to say that the 200-transaction rule applied until Notice 2011-42 was obsoleted, so penalty relief is needed only prospectively. However, the Notice does not explicitly state that the 200-transaction rule continued to apply post-ARP, which has no such rule. Similarly, the statement, "under the regulations, TPSOs are required to obtain a TIN from every payee in a third-party payment network," does not seem to acknowledge the 200-transaction rule.