As tax season gets underway, a little-noticed provision in the American Rescue Plan (ARP) enacted last spring is now garnering more attention, and much of that attention revolves around a fundamental misunderstanding. Several commenters have characterized the changes as a tax increase, but they are not.

Generally, when a business hires an  independent contractor, the business is required to issue a Form 1099 (formerly, 1099-MISC until 2020, now 1099-NEC) if the business makes payments of $600 or more. This reporting requirement has been in the law for more than a century (since 1918) and was originally used to report compensation of more than $800.

With the advent of the gig economy, there was concern that the 1099-MISC reporting would not be sufficient to cover emerging business models selling goods and services on the internet, and the 1099-K reporting requirements were established in the Housing and Economic Recovery Act of 2008. They went into effect in 2011, and the IRS finalized Form 1099-K in 2012.  

Form 1099-K was designed to capture reporting of payments to independent contractors and online sellers that were being paid using various electronic payment platforms rather than the more traditional cash, check, or direct deposit. Congress set the filing threshold for Form 1099-K reporting at $20,000 in payments and 200 transactions.  

Effectively, this created an information reporting gap of $19,400 (and 200 transactions) between the Form 1099-MISC $600 reporting threshold and the substantially higher 1099-K reporting threshold, resulting in independent contractors being treated completely differently depending solely on the method by which they were paid.

So, for example, if someone drove for Uber or Lyft and made $7,000 over the course of a year, the company was not required to provide that person any year-end tax documentation to assist in tax preparation. However, if that same person drove for a traditional taxi company as an independent contractor and made exactly the same amount, the company would likely need to provide Form 1099-MISC (or NEC) reporting. In both cases, the driver was required to report the income for both income and employment tax purposes.

The ARP eliminated this gap by lowering the 1099-K threshold to $600 and eliminating the transaction requirement, resulting in more consistency of reporting regardless of the payment method. Any tax liability on the income being reported remains the same.

This is not to say that other concerns regarding the law change are misplaced:

1. The $600 Form 1099-NEC and Form 1099-K threshold is too low.   

The $600 threshold for Form 1099-MISC—and now 1099-K—reporting was established in 1954. Today, that would equal more than $6,200. 

2. The new $600 Form 1099-K threshold raises privacy concerns and could trigger unnecessary audits. 

The second concern is that the new Form 1099-K lower threshold required by the ARP is too broad and may potentially include peer-to-peer payments made through various electronic payment platforms (e.g., Venmo).  

3. More taxpayers will move to cash payments to avoid reporting. 

The third point is that this reporting should be a wake-up call to those who are blithely going along with increased reliance on non-cash payments. Those who value privacy and freedom might consider renewing their relationship with cash.  

The bottom line is that the ARP reporting requirement changes should have no impact on the tax liability of anyone who was already complying with existing law. The changes aren’t perfect and are overly broad, but they are not a tax increase.