Tax planning season starts in the fall for financially savvy people. Millions of these families will find that next spring’s annual slog through tax return preparation is going to get a lot worse for them even though they did nothing more than sell old baby clothes on Meta’s Facebook Marketplace or split the monthly rent on Apple Pay.
If Congress doesn’t stop it from happening by Dec. 31, millions of Americans with payment apps on their phones (Apple Pay, Google Pay, Cash App, etc.) or who casually sell on internet sales platforms (eBay, Etsy, Facebook Marketplace, Shopify, Craigslist, etc.) will receive a 1099-K tax form. The trigger for getting this tax form —which most taxpayers have never received — is for a user to generate a mere $600 in money by using the service. Many taxpayers will get multiple 1099-Ks, depending on how online they are with sales and peer-to-peer cash payments.
It wasn’t always this way.
Prior to 2021, and via temporary IRS indult since then, the threshold for triggering a 1099-K was $20,000 of activity on any particular app or platform, as well as a minimum of 200 transactions. This effectively filtered out startup micro-businesses with low or no profits, casual sellers of used goods who sell at a loss and by definition have no tax liability, and friends splitting expenses with each other. None of those transactions are taxable under the law, but they all now can and will generate 1099-K forms that must be accounted for somehow on your taxes.
If you got a 1099-K before Congress lowered the threshold in 2021, it’s because you very likely had a bona fide business like a food truck or a self-employed cleaning service. Starting in January, every neighborhood teenage babysitter and garage sale will trigger a tax form — and potentially an audit.
The companies that have been dragooned by Congress into issuing these $600 threshold 1099-K forms are supposed to exclude personal transactions. That sounds good in theory, but in the real world, taxpayers will not be so neat and tidy as to remember to pay for “Service A” as a business expense and “Service B” as a personal expense. The only way to parse it is for the IRS to audit your transactions and see for themselves.
IRS commissioner Daniel Werfel has said that the agency will not be granting another “transition year,” as it has until now. Taxpayers can expect to see a deluge of 1099-K forms coming in January unless Congress acts.
The National Taxpayers Union Foundation recently updated a 1099-K study that projects 14 million to 40 million 1099-Ks will be issued. Again, this is a tax form most taxpayers have never seen. Commissioner Werfel has urged Congress to provide relief, as no one is prepared for tens of millions of confusing new tax forms — not the IRS, not the businesses forced to issue them, not tax professionals, and least of all taxpayers and customers.
For most taxpayers receiving a 1099-K, they won’t know what to do with it. Some will ignore it, triggering an instant nasty-gram or audit from the IRS. Some will pay taxes on the amount reported on the form, even if they have no tax liability at all from the activity.
The 87,000 new IRS agents approved by Congress last summer surely have better things to do with their time than harassing couples splitting vacation bills or moms selling used onesies.
Fortunately, Congress seems to be moving. Congressman Carol Miller’s (R-W.Va.) “Saving Gig Economy Taxpayers Act” has passed the Ways and Means Committee and awaits a floor vote this fall. Sen. Bill Hagerty (R-Tenn.)’s equivalent bill has the support of nearly two dozen of his colleagues. In a preview of a possible bipartisan compromise, Sens. Sherrod Brown (D-Ohio) and Bill Cassidy (R-La.) have introduced the “Red Tape Reduction Act,” which would raise the thresholds from $600 and one transaction to $10,000 and 50 transactions, respectively.
Whatever Congress does, it has to happen by the end of the year. The IRS will not be granting any more reprieves. And if Congress again fails to act, taxpayers will be hit with a 1099-K paperwork tsunami and follow-on IRS audits no one is ready for.
Ryan Ellis is the president of the Center for a Free Economy, and an IRS enrolled agent.
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