As the tax season has progressed, a little-noticed provision in the American Rescue Plan Act (ARPA) enacted last spring is 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, they are required to issue a Form 1099 (1099-MISC until 2020, now 1099-NEC) if the business makes payments of $600 or more. This reporting requirement has been 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 1099-MISC reporting would be insufficient 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 the Form 1099-K in 2012.
Form 1099-K was designed to capture reporting of payments to independent contractors and online sellers via electronic payment platforms rather than 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 differently depending solely on the payment method.
For example, if you drove for Uber or Lyft and made $7,000 a year, the company was not required to provide any year-end tax documentation to assist in tax preparation. However, if you drove for a traditional taxi company as an independent contractor and made the same amount, the company would need to provide Form 1099 reporting. In both cases, you are required to report the income for income and employment tax purposes.
ARPA closed this gap by lowering the 1099-K threshold to $600 and eliminating the transaction requirement, resulting in more consistent reporting regardless of payment method. Any tax liability on the income remains the same.
This is not to say that other concerns regarding the law change are misplaced.
The $600 Threshold Is Too Low
The $600 threshold for Form 1099-MISC — and now 1099-K — reporting was established in 1954. In today’s dollars, that’s more than $6,200. The $600 threshold was never indexed for inflation or otherwise raised. Some have argued that it is too low and should be increased.
A related point is that if Schedule C net income is at least $400, a Schedule SE must be completed to determine the amount of employment tax owed. An independent contractor is liable for both the “employee” contribution and the employer contribution, totaling the amount that would be paid were the person a traditional employee. This amount, in part, goes toward Social Security, and the contractor theoretically gets Social Security credit.
However, it currently takes $1,510 in earnings to earn even a quarter credit. It makes sense then that the Form 1099 and Schedule SE filing thresholds should be increased to at least this amount to ease taxpayer compliance burdens.
Privacy Concerns And Unnecessary Audits
The second concern is that the new Form 1099-K reporting is too broad and may capture peer-to-peer payments made through various electronic payment platforms (e.g., Venmo). While these platforms claim “they can tell” which payments are business-related, the risk remains that non-taxable transactions will be reported anyway and triggers privacy concerns.
If you sell your car at a loss but for more than $600 and receive payment electronically, it is none of the IRS’ business. At the same time, that transaction may result in a Form 1099-K filing, leading to unnecessary audit notices and headaches for taxpayers.
This also raises the question of who should be responsible for the reporting requirements. The answer seems easy if you drive for a company like Uber that collects all payments centrally then remits payment to its drivers. In that case, Uber should arguably provide reporting.
However, if you’re a hairdresser, rent a station from a salon, and collect payment from each customer individually, then, despite working under the auspices of the salon, you are running your own business and are the central collection point.
This is where third-party payment platforms become the most relevant and why ARPA expanded reporting requirements to include them. While more businesses, especially small businesses, are relying on electronic platforms, the reporting expansion seems insufficiently targeted to capture business income without ensnaring peer-to-peer transactions that are not taxable compensation.
More Taxpayers Will Use Cash
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.
Transactions that can be tracked can be controlled, and having Big Brother looking over our shoulders for every $2 cup of coffee is not a place we want to be. Insisting on retaining the right to use “legal tender for all debts, public and private” as is printed on our money is essential to retaining the autonomy and freedom we value.
What is also important here is what this law change is not. There has been significant confusion among many who conflate the ARPA law change with a Treasury Department proposal to require banks to report all transactions of $600 or more. Presumably, the $600 threshold was derived from the 1099 reporting requirements and was intended to identify income that was not being reported but on which tax was owed.
This proposal was floated for inclusion in the Build Back Better bill and was widely denounced. The proposal was never actually included in the bill, and it never became law.
Finally, the utility of reporting this information is questionable. Lawmakers commonly require the IRS to collect and maintain various financial information that is irrelevant to tax liability.
This results in the IRS being overloaded with information that is useless to them. For an agency that is already struggling with staffing, budget, and outdated technology issues, much of the information collected from the ARPA changes would be at best irrelevant and at worst a drag on their limited resources that would ultimately hinder essential operations.
The bottom line is that the ARPA reporting changes have no impact on the tax liability of anyone who was already complying with existing law. The changes are bluntly crafted, but they are not a tax increase.