Episode 34: Form 1099-K, Part 2 -- Why the $600 Threshold Was Reversed

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This week on Information Return Intelligence, it's part two of our discussion about Form 1099K. And this week we talk about Congress in 2025 reversing course on a change in the reporting threshold and rolling everything back to the way it was with 1099K. And we talk about why Congress had first said they wanted to change the threshold. And then two big arguments against changing the threshold. So that's why the big beautiful bill rolled it back to the way it was before. It's part two of our 1099K discussion this week on Information Return Intelligence powered by IOFM. My name is Jason Dinison. Welcome to the show. Well, this week we're trying something different. We do both an audio and video version of Information Return Intelligence, and the video version has always just been me standing there behind a microphone. We're working on getting a real setup like me behind a table and maybe some nice decor to look at. We're also experimenting with, if you watch the video, we have some companion images. It is a PowerPoint, but it's not really an in-depth PowerPoint. That just helps with some of the key points in the podcast if you're watching on YouTube. If you're listening to the audio only, that's okay. It'll be just the same as always. So let's get started with this week's episode, part two of Form 1099K and why this change to the reporting threshold became so controversial. Now, I'm not going to go deep into the ins and outs of 1099K because that was part one. And we'll have a link in the show notes that'll take you to part one if you want to see that or listen to that. We do need to do just a quick overview of 1099K thresholds, though, so that you understand more here in part two. Form 1099K was created in the Affordable Care Act, and it called for third-party settlement organizations, which are all those different payment apps and platforms that are out there. Venmo and PayPal, Etsy is another one. There are many. And that was really controversial as you can imagine that it would have been. So that's what we have now with 1099 Ks and these third-party settlement organizations a 200 transaction and $20,000 threshold. Now there's more to this than just simply small business owners complaining that they would get more forms. That's part of it. But we're going to dive into what was Congress after. And then there's two things that I feel are really legitimate complaints about this. Beyond just, oh, I got a reporting form, it's more what good would it have done? We'll talk about that today. That's really a big focus of this episode. It would have been an exercise in futility, and it would have overwhelmed the IRS's computers. So what Congress was getting at with this, and this is not hooray for the IRS or hooray for Congress. Isn't this great? That's not what I'm trying to get at by saying this. It's just giving you facts about what Congress, remember, this is Congress, not the IRS. The IRS is just the enforcer. Congress wrote the law. They were getting at trying to draw more under-the-table businesses out into the open. More reporting equals more compliance. And that means more people reporting their income and theoretically more tax revenue being created for the government. Again, I'm not saying hooray for the government. I'm just saying that's what the idea was when Congress did this in the American Rescue Plan. As we will talk about today, the actual outcome on this probably would have been a loss for the government. Avalera did a survey, and there's a link that you can click on. For those of you listening to the audio, there's a companion substack article, and actually we'll have it in the show notes of the audio version of the podcast. Avalera did a survey, and if you go to that link, one thing to be aware of is that the thresholds referenced in that survey and the press release about the survey reference things before the big beautiful bill changed it all back to the way it was before. But under the American Rescue Plan proposal to bring it down to $600 for $1099K, the numbers showed 20% plan to quit one of their gig economy jobs. This is an Avalera survey of gig economy workers. 20% plan to quit because of this change. 19% were going to change their earnings strategy. 15% said they would look at using tax software themselves for the first time. 20% said they planned to take on under-the-table work. And 15% said they were going to switch to Zell or some other payment method that doesn't issue a 1099K. And 16% said, I'm getting out of this and finding something else to do. So this would have had a significant impact on the gig economy. Now, some of the articles that were published on this by tax professionals were just flat out wrong. And I want to be clear that I'm not, again, I'm not saying hooray for the government. This is all great. Yay, that's not what I'm saying. But this 1099K is always for business related transactions. Now 1099Ks do get issued in error. There's no question about that. But some of the articles written by tax pros on this made it sound like the IRS, some literally said the IRS is coming for your Venmo transactions. Well yeah, if you're in business, they're coming for your Venmo transactions, but personal transactions, your fantasy football dues, and reimbursing your friend for dinner or whatever, those things would not have been reported on a 1099K. They weren't supposed to be. Again, it is true to say that there would have been 1099 Ks issued in error. That happens even under the 200 transaction and $20,000 thresholds. 1099Ks get issued in error. But I feel like there really are two things that we should focus on when we look at why a reduction in the threshold down to $600 for Form 1099K would not have been good. One, yes, it would have brought a lot of small-time operators doing under the table things in the shadows, it would have brought them out into the open and compelled them to file a tax return. More visibility, but probably not more tax. Maybe a little more tax, but also enforcement for the IRS, and we'll talk about this in a second. How many more forms they would have had to process? And how could they even process all of them? Even using computers, how could they process all of these forms that they would receive? But let's look at before we get into the number of forms that the IRS was going to receive, let's talk about how much revenue would have been generated by this. You force that small time seller at Etsy to file a Schedule C to report their small time sales. Say they have a thousand dollars in sales, that's not really their income though, because they have cost of goods sold. Now I don't know what the cost of goods sold would be for a reseller on Etsy. But there would be something for cost of goods sold, and that means the actual profit that would be taxed would be measured in the hundreds of dollars. And say that they had $900 of cost of goods sold. So a profit of a hundred bucks, and they're in the 12% tax bracket, the government would get $12 of additional tax revenue. Now, to be certain, there are people making a lot more money and a lot more profit who haven't reported things through the years, that is true. And they would have been forced into reporting and paying more tax. That is true, but how many of those people are out there versus much smaller fries? Maybe they make a few hundred bucks, maybe they're even losing money. We'll talk next about how many more forms the IRS would have received, and how this all would have been an exercise in futility, and I wouldn't be surprised if the government would have lost money on all of this. But first, let's hear a word from our sponsor, IOFM, the Institute of Finance and Management. The Institute of Finance and Management has certified over 25,000 financial operations professionals worldwide through its certification programs. These programs include accredited payable specialist or manager with U.S. and Canadian specific versions available, accredited receivable specialist or manager, certified professional controller, and certified payment reporting specialist. I'm the one who teaches that certified payment reporting specialist, that's the 1099 specialist certification. These are globally recognized AP and AR certifications that are well respected within the industry. These are available in English, simple Chinese, and Spanish. Learn more at IOFM.com. And now back to the show. So we just talked before the break about how a lot of people would have been drawn into the tax system with their little side businesses and under the table things that they hadn't reported before, but how much more tax would that have generated versus how much would it have cost the IRS to keep up with all of this? Well, the IRS studied that, actually, and in 2023, which would have used the 200 transaction and $20,000 threshold, they received 12.2 million 1099Ks. They projected that a change to $600 for the 1099K threshold would have resulted in 33 million 1099 Ks being filed, nearly triple the workload, which begs the question of even though these would have probably all or almost all been e-filed, what on earth would their systems do with all of these forms? And if one of those small-time operators making a few hundred bucks said, Yeah, I don't care, I'm not reporting this, how would the IRS have actually enforced anything? And if they did try to enforce something, the cost in manpower, in people power, would have been more than the tax that they would have generated from the enforcement action. So this was all a concept of a plan put into action in the American Rescue Plan that never actually took full effect. There was one year, 2024, where the threshold got dropped to 5,000. But then the big beautiful bill reset it all back to the old way for 2025 and beyond. I think that the moral of the story really is more reporting doesn't always equal better enforcement. Because as we've talked about today, how could the IRS have kept up with all of this and the cost on their side? I've not seen what the revenue projections were from this and what the expense projections were, but and I don't even know if that information is even available anywhere, if anyone ran those numbers, but I think we can pretty easily just look at it and say, yeah, this probably would have lost money for the government. So that'll do it for part two. Join us again for part three. Now, those of you listening to the podcast, when it drops on June 30th, it won't be next week, because next week is our quarterly roundup of what's new with 1099s and 1042s, the W9, etc., etc. But at some point in the next few weeks, we'll have part three. And in part three, we're going to bring our discussion back to how this affects issuers of the 1099 NEC and what those issuers, those accounts, payable departments, and so forth need to be doing. That's it for this week's episode of Information Return Intelligence. Make sure to like and subscribe. You can check out all episodes now, either on YouTube or the audio and video both are at podcasts.dinasonmedia dot com. And all other dinoson media ventures productions are shown at podcasts.com. Information return intelligence is powered by IOFM. Thanks so much for joining us. We'll talk to you again next week.