Why 1099-Ks Could Be a Tax Professional’s Headache This Season

Think 1099-Ks were just another form to glance at? Think again. The IRS is doubling down on third-party payment transactions, and CPAs must stay ahead of the curve. Gone are the days of the $20,000 threshold now, with reporting dropping to $5,000 for 2024, $2,500 for 2025, and a staggering $600 for 2026, these forms are about to flood in like never before. If you think your clients will keep track of them on their own—let’s be real, that’s not happening. It’s up to CPAs to step in, ensure proper compliance, and prevent costly mistakes before tax season chaos ensues.

Not Every Dollar Is Taxable Income

One of the biggest misconceptions surrounding 1099-Ks is that every dollar reported equals taxable income. That’s not the case. These forms report gross transactions, not net income, and do not differentiate between business and personal transactions. CPAs must be vigilant in ensuring clients don’t inadvertently overreport income.

For example, a client who sells handmade crafts on Etsy and also gets Venmo payments from family for splitting dinner bills may find both types of transactions lumped together in their 1099-K. If not properly separated, they could end up paying taxes on non-taxable income. The solution? Encourage clients to maintain separate accounts for business and personal transactions and implement meticulous bookkeeping practices.

The Hidden Adjustments

Not all funds reported on a 1099-K land in a taxpayer’s bank account. Returns, chargebacks, and processing fees can distort the income picture. If these are not accounted for properly, clients may face higher tax liabilities than necessary. For instance, if a business processes $20,000 in sales but issues $3,000 in refunds and incurs $500 in processing fees, the IRS still sees $20,000. Without proper reconciliation, that business could overpay taxes on $3,500 of phantom income. CPAs must compare 1099-Ks against clients’ sales records, refund logs, and bank statements to ensure accurate reporting.

Professionals should also be aware of state-level reporting thresholds that may differ from federal guidelines. States like Maryland, Massachusetts, Vermont, Virginia, and Washington, D.C., already enforce a $600 reporting threshold. Clients operating in these states may receive 1099-Ks earlier than expected, requiring additional tax planning.

When a Client Gets a 1099-K

It’s inevitable: A client will receive a 1099-K for money that was never business income. Maybe they collected rent from roommates through PayPal or were reimbursed for a group trip via Cash App. The worst response? Reporting it as taxable income simply because it’s on a tax form. CPAs should advise clients to request a corrected 1099-K from the issuer, though getting that correction may be easier said than done. If a correction isn’t possible, CPAs should properly adjust the reported income on the tax return, documenting non-business transactions to avoid IRS scrutiny. If a correction isn’t available, an adjustment can be made using Schedule 1 of the tax return instead of Schedule C or E, along with proper documentation in case of an IRS inquiry.

Unlike PayPal, Venmo, and Cash App, Zelle transactions are not subject to 1099-K reporting since Zelle facilitates direct bank transfers rather than holding funds. However, CPAs should remind clients that even though Zelle transactions won’t generate a 1099-K, business income received through Zelle is still taxable and must be reported.

How CPAs Can Stay Ahead of the IRS on 1099-K Compliance

The IRS’s decision to lower 1099-K thresholds isn’t arbitrary, it’s an effort to close the tax gap by capturing unreported income. That means CPAs need to be proactive in client education and compliance strategies. Key steps include:

• Encouraging clients to separate business and personal transactions early to avoid confusion when tax season rolls around.
• Implementing consistent record-keeping practices, ensuring clients reconcile transactions monthly rather than scrambling in April.
• Preparing for IRS scrutiny by documenting discrepancies and ensuring tax returns reflect actual taxable income rather than reported gross payments.
• Educating clients on backup withholding risks, starting in 2025, failure to provide a valid taxpayer ID could result in platforms withholding 24% of payments, even on a client’s first transaction.
• Anticipating increased IRS audits as the agency expects a surge in 1099-K filings, leading to heightened enforcement efforts. CPAs should prepare clients for possible IRS notices if discrepancies arise between reported income and 1099-K amounts.

The IRS initially planned to drop the 1099-K threshold to $600 immediately but decided to phase it in gradually due to concerns from tax professionals and organizations like the AICPA. The phased approach allows CPAs and clients more time to adapt to the new reporting landscape.

The Bottom Line

For CPAs and tax professionals, the shift in 1099-K reporting isn’t just a compliance headache, it’s an opportunity to strengthen client relationships and demonstrate value. Clients who receive these forms need guidance, and those who rely on their CPAs to make sense of the changes will see the difference between tax preparers who merely file returns and professionals who proactively protect them from IRS issues. By taking a strategic approach, educating clients, identifying discrepancies early, and ensuring accurate reporting, CPAs can solidify their role as trusted advisors in an increasingly complex tax environment. The IRS is paying attention, and CPAs should be, too. Stay in the know with the latest financial news and insights—subscribe to our newsletter and never miss a beat!