In 2021, Congress significantly lowered the reporting threshold associated with Form 1099-K — paperwork meant to target taxpayers with substantial income from third party sales on online platforms. Prior to 2022, the threshold was set at $20,000 in aggregate payments and 200 transactions. Individuals who receive $600 in aggregate payments from a platform, with no minimum number of transactions, will now receive a 1099-K form.
The new $600 threshold means that millions of Americans will likely receive 1099-K forms in early 2023 for the first time. To avoid this flood of unnecessary taxpayer paperwork and confusion, Congress should take action to raise the threshold before the end of the year.
1099-K forms are issued by third-party payment vendors like PayPal and Venmo — or resale sites like eBay, Poshmark, etc. — when people exchange money for goods or services on the platform. The threshold is meant to encompass sellers who run businesses, but a lower threshold captures a much larger audience. This means that individuals who occasionally sell used items such as clothing will be affected by Form 1099-K changes. Taxpayers are likely to be confused about whether their income on the platform is taxable, what they have to report, and what they may owe.
Online sales platforms are often not used for business transactions. Rather, individuals are simply re-selling used personal items to clear out space and receive some money for it. If the sale of personal items is not more than the original purchase price, a person should not owe federal taxes on the transaction. However, many people could easily reach the new $600 threshold from online transactions for items such as second-hand concert tickets, household items, and more. Although it is extremely difficult to make profits from these e-commerce sales, people will still be mailed 1099-K forms. Taxpayers may be confused and assume these transactions represent taxable income.
Tax filing season already offers many challenges. The Internal Revenue Service (IRS) is fraught with delays as it fails to meet the volume of taxpayer communications. A flurry of new 1099-K forms would add dysfunction and make taxpayer correspondences even more inefficient. Raising the threshold would be a common-sense solution that could help streamline the system for taxpayers.
NTU placed 1099-K reform as the number one issue on its 2022 “No Brainers” legislation. There is bipartisan support for bills to address this issue. While Republican legislation has focused on reverting to the previous threshold of $20,000 and 200 transactions, Democratic efforts look to raise the threshold to $5,000.Congress could benefit millions of taxpayers by finding a compromise between these two proposals. Although raising the threshold back to $20,000 and 200 transactions could help more taxpayers than a lower threshold, raising the threshold to $5,000 or finding a higher agreement would also help address the problem in a meaningful way.
Congress should take action to raise the threshold back to $20,000 and 200 transactions, or pursue other reforms to boost minimum payments and transactions for Form 1099-K. With tax filing season fast approaching, it is crucial to address this problem with urgency as millions of taxpayers stand to be impacted by the lowered threshold.