New 1099-K Filing Rule Adversely Impacting Small Business Owners

A new Internal Revenue Service (IRS) rule is already putting a strain on struggling small businesses. 

Individuals and small businesses using third-party apps must now submit Form 1099-K whenever they accept payments exceeding $600. 

This measure was adopted following the passage of the American Rescue Plan of 2021. Section 9674 of the law lowered reporting thresholds for Form 1099-K filings from “$20,000 in aggregate payments and 200 transactions” to denominations of “$600 in aggregate payments (with no minimum transaction requirement).” This went into effect on December 31, 2021. 

These changes were observed during the 2022 tax season.

The Coalition for 1099-K Fairness, a group formed by platforms eBay, Etsy, Mercari, OfferUp, Poshmark, Reverb and Tradesy, opposes this new rule and is committed to “protecting casual online sellers and microbusinesses from unfair tax and privacy burdens.” 

“The new reporting threshold of only $600 means that Americans who sell only used goods and owe no taxes will now get confusing IRS forms, and many will be forced to consult costly tax experts when they normally handle their own returns, or risk over paying on their taxes” the group writes on their website. “Even those who do not owe taxes may lack the documentation they need to file appropriately. Already-strained IRS resources will be spent processing hundreds of millions of new forms – even when no reportable income was generated.” 

IWF Visiting Fellow and tax expert Kimberly J. Pinter examined this new 1099-K reporting regime and found potential privacy concerns. 

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.

The Coalition similarly worries “online marketplaces will now be required to collect full social security numbers for sellers, even when they only have a few hundred dollars in online sales.” 

One seller, a retiree in Iowa, lamented the new provision in a Des Moines Register op-ed.

“It is confusing because the sale of used personal items, for example an old lamp or rug, is not taxable so long as it doesn’t exceed the original purchase price the seller paid,” wrote Sheila Flanders. “There are millions of Americans of all ages who sell used goods online out of necessity. Whether it’s to help pay rent, buy groceries, or put gas in the car, they are depending on those extra dollars to see them through to the next paycheck. And online marketplaces offer an easy way to make that money. I know it has certainly made a difference for my husband and I over the years. But throw in the IRS and a new tax form and suddenly, selling online isn’t so easy anymore; instead, it will discourage people from participating.

Another reseller, Tanya Jun from Nevada, similarly lambasted the new policy for having access to sensitive personal data. 

“Just the thought of having to deal with the IRS — and turn in sensitive personal information —over selling a couple of hundred dollars’ worth of stuff will certainly deter potential sellers who must then find some other way to earn the money they need,” Jun wrote in the Nevada Appeal. “For me, selling motorcycle parts grew over time into a successful small automotive parts business. As a business owner, I keep diligent records and know how difficult filing taxes can be. Life would have turned out far different for me had this low reporting threshold been in place years ago. Dealing with the IRS and trying to find old receipts would have made me think twice about selling online in the first place. I know what it’s like to have to try to make ends meet, and everyone should be able to turn to selling online when they need to without worrying about the IRS coming after them. The $600 reporting threshold — if kept in place — takes that opportunity away from people who need it most.”

Similar attempts by the Biden administration to “improve tax enforcement” have been scrutinized and quickly rejected. This addition, however, is being challenged by members of Congress.Federal lawmakers from both major parties have demanded the 1099-K reporting threshold should, at minimum, be increased to $5,000 or restored back to $20,000. 

The IRS shouldn’t be creating more headaches for casual sellers and upstart entrepreneurs by throwing more paperwork their way for small transactions.