Common Misconceptions About the Form 1099-K Reporting Threshold for 2025 TY

OBBBA update

The federal 1099-K threshold for payment apps, online marketplaces, and other third-party settlement organizations is back to the higher rule: more than $20,000 in payments and more than 200 transactions. This threshold applies to third-party network payments, not payment card payments, which can still be reported regardless of the amount. Sellers should also remember that taxable income from goods or services must be reported even when no Form 1099-K is issued.

If the current Form 1099-K reporting rules have you confused as an online seller, you’re not alone. But don’t worry we are here to help you separate fact from fiction.

Below, we’ll address some common misconceptions you might have heard about these rules and the truth about how your taxes could be affected.

Misconception 1: This is a new tax that you will have to pay on all your profits.

The truth: This change is not a new tax imposed on online sellers but a new reporting requirement for online marketplaces. Any income derived from a sale has always been reportable income for sellers.

Recap of the IRS reporting changes

OBBBA brought the federal third-party network reporting rule back to the older standard. For payment apps, online marketplaces, and other TPSOs, Form 1099-K is generally required only when a payee has more than $20,000 in payments and more than 200 transactions. That means the earlier phase-in amounts of $5,000 and $2,500, along with the planned $600 threshold, no longer apply at the federal TPSO level. Card payments are treated differently and may still be reported regardless of the payment amount. Some states may also follow lower reporting thresholds.

Form 1099-K reporting thresholds

Because OBBBA reinstated the higher federal TPSO threshold, fewer sellers may receive Form 1099-K solely because of third-party network payments. However, sellers may still receive the form for payment card transactions, lower state thresholds, backup withholding, or voluntary platform reporting below the federal threshold.

Misconception 2: All the transactions on 1099-K are taxable.

The truth: Taxes are imposed on the net income whereas a 1099-K only shows the gross receipts. The amounts reported on Form 1099-K do not consider the cost basis and any adjustments for fees, refunds, credits, etc.

• If an item was sold at a net loss against its original cost basis, it should be reported as a loss on Schedule 1 or Schedule D. There will not be any income taxes on that particular sale.
• Where the 1099-K amount goes on your return depends on what the payment was for:
• If you have sold a personal item for less than its original cost, it usually does not result in taxable income. You have to keep purchase receipts, sale records, and any notes that show the item was sold at a loss, especially when the amount appears on Form 1099-K.
• A personal item sold for more than its cost is handled differently. In that case, the gain is usually reported as a capital gain, often on Form 8949 and Schedule D.
• For hobby sales involving goods or services, IRS guidance directs taxpayers to report the Form 1099-K payment information on Schedule C.
• When the activity is carried on to make a profit, report the income and related expenses as business or self-employment income, commonly on Schedule C for a sole proprietor.

Misconception 3: Payments from friends and family are reported on a Form 1099-K.

The truth: Payments from friends and family generally should not be reported on a Form 1099-K. This form is meant for payments involving goods or services not personal transactions. Whether it’s splitting dinner, sending a birthday gift, or reimbursing a friend for a group trip, personal payments typically don’t belong on Form 1099-K. Payment apps often default to personal payments unless the sender explicitly indicates it’s for goods or services, or if the account is designated as a business account.

A 1099-K can include amounts that do not belong in taxable income, especially when personal transfers get mixed in with business or selling activity.

Go back to the source records first the app history, bank deposits, receipts, messages, or notes and mark which payments were actually for goods or services and which ones were gifts, reimbursements, or shared expenses.

For a form that is clearly wrong, you’ll need to ask the payment platform to correct it. However, if you do not get the corrected copy right away, don’t wait. Move forward with filing instead and follow the IRS 1099-K reporting guidance and show an adjustment for the part that was personal, nontaxable, or reported by mistake. Keep the backup records. Also check for duplicate reporting when the same payment appears on Form 1099-K and another form, such as Form 1099-NEC.

Misconception 4: Only businesses have to report sales profits as income, and it doesn’t apply to a casual seller.

The truth: Taxable income includes any income made from sales, whether you’re a casual seller, hobby seller, or a business.

If casual selling becomes a regular profitable occurrence, the IRS may start to consider the hobby to be a formal business. For example, thrifting old furniture could start as a hobby but turn into a profitable business.

Misconception 5: Selling under the reporting threshold indicates no Form 1099-K.

The truth: The federal threshold applies to third-party settlement organizations such as payment apps and online marketplaces, but it does not work the same way for every payment channel.

If you accept direct credit, debit, or stored-value card payments for goods or services, a payment card processor may issue Form 1099-K regardless of the dollar amount or number of transactions.

A payment app or marketplace may also issue the form below the federal threshold if a state has a lower reporting rule, if the platform chooses to furnish forms at a lower amount, or if backup withholding applies.

Treat the form as an information document, then use your own records to separate taxable sales from refunds, fees, reimbursements, and personal payments. Not receiving Form 1099-K does not make income non-taxable sellers must still report taxable income from goods or services.

Who Files Form 1099-K?

The organizations that may file and send a Form 1099-K include (but are not limited to):

• Auction sites
• Car sharing or ride-hailing platforms
• Craft or maker marketplaces
• Crowdfunding platforms
• Freelance marketplaces
• Online marketplaces (sale or resale of clothing, furniture, and other items)
• Peer-to-peer payment platforms or digital wallets
• Ticket exchange or resale sites

Final Thoughts

Understanding IRS Form 1099-K doesn’t have to feel like unraveling a mystery. By separating myths from facts, you can approach tax season with clarity. So, grab those records, calculate correctly, and turn tax chaos into Zen filing. After all, knowledge is the best tax prep tool you’ll ever have.

Cleared the confusion? Now time to file your 1099-K

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