Following years of reported noncompliance by the gig economy, the government has crafted a new way to ensure it gets its pound of flesh from your side hustle. Beginning in 2022, third-party payment networks – like PayPal and Venmo – will be required to expand their reporting of business transactions to the IRS at a much lower threshold.
While third-party payment networks have always been required to report transactions to the IRS, the “American Rescue Plan” lowered the reporting threshold to $600. Previously, the threshold for reporting was $20,000 and 200 transactions. The reporting obligation only applies with respect to business transactions (the sale of goods or services); however, the taxpayer need not be a business to be subject to reporting. Taxpayers who have received payments for goods or services exceeding the annual threshold can expect to receive Form 1099-K from the third-party payment network. Form 1099-K reports transaction totals to both the taxpayer and the IRS.
Transactions that are marked as personal transactions (i.e., friends and family transfers) are not subject to reporting. Although gig workers could duck reporting by requesting that customers mark transactions as personal transfers, this comes at the cost of marketplace safety and purchase protection – a cost customers will not likely pay to help vendors evade their taxes. Additionally, PayPal (which also owns Venmo) says it will monitor accounts to ensure that personal payments are not being used for sales of goods and services. While some third-party payment networks have indicated that they will treat business and personal accounts differently, it is unclear whether they have the authority to do so.
While these reporting measures are likely to increase compliance in the gig economy, they are equally likely to incite panic among taxpayers who have had a garage sale during the year or sold used furniture on Facebook Marketplace. While these types of transactions are generally not taxable (when the items were purchased for more money than the sales price), the third-party payment network will still be required to report these transactions on Form 1099-K. To mitigate the risk of receiving a notice from the IRS, these taxpayers should report the nondeductible personal losses (as the case may be) on their tax returns so that the IRS can match the proceeds to the return.
There is also a risk that many taxpayers will overpay taxes with respect to proceeds reported on 1099-K. Taxpayers who self-prepare their returns using a commercial DIY tax software may simply key in the information reported on 1099-K and move on – paying tax on the entirety of the proceeds without an offset for the cost of the items. Oftentimes, taxpayers will not remember or have any record of the cost of items sold at a garage sale or on Facebook Marketplace, further complicating the issue.
If you receive a 1099-K and find yourself unsure about how to report it, please reach out to an HBK Tax Advisor.