A last-minute insert by Democrats looking to offset the cost of their coronavirus aid package would send tax collectors into the gig economy, eventually costing Uber and DoorDash drivers, Airbnb hosts and others about $1 billion annually.

Under current law, such online platforms only have to report to the IRS when they pay individuals at least 200 times a year, for a minimum $20,000. The change inserted into a managers’ amendment just before House floor debate on the $1.9 trillion measure would cut that threshold to $600, regardless of how many transactions, generating an estimated $8.4 billion in extra tax revenue through fiscal 2031.

For decades, brick-and-mortar businesses have had to send tax reporting forms based on payments to vendors greater than $600. But the rise of eBay Inc. as a major player in the online market for connecting buyers and sellers of various wares highlighted a problem for the IRS: tracking how much money thousands of individual online merchants were making.

So in 2008 when lawmakers needed an offset for housing market tax incentives they established an income-reporting regime for “third-party settlement organizations” to try to capture some of that underreported tax liability. But they set the threshold high enough to keep the paperwork burden manageable and not discourage online commerce.

The $20,000 and 200-transaction thresholds didn’t contemplate the explosive growth of the gig economy in recent years, with all manner of third party settlement organizations appearing on the scene. “No one was thinking about Uber and Lyft and Airbnb,” said Caroline Bruckner, a tax professor and managing director of the Kogod Tax Policy Center at American University.

Even though the advent of smartphones and the gig economy has since dwarfed eBay, the IRS still defines third party settlement organizations on its website by the eBay definition: “online auction payment facilitators.”

Eyeing that underreported online income, lawmakers in the last three Congresses have sought to lower the reporting threshold. Companies lobbying on related legislation in the 116th Congress included Uber, Lyft and TaskRabbit, as well as trade groups TechNet and the Retail Industry Leaders Association.

Now, the stiffer tax burden would be imposed while 10 million Americans are unemployed and more and more have turned to freelance and gig economy work to make ends meet. Cutting the reporting threshold “adds a significant burden to gig economy and small business workers at the worst possible time,” TechNet spokesman Steve Kidera said in an email.

‘Destroy a person’s life’

Unlike the 2008 change, which delayed implementation until 2012 to give businesses time to adjust, the new lower reporting threshold would take effect starting in 2022.

Nina Olson, who ran the IRS’s taxpayer advocate services for 18 years, predicted the estimated tax revenue will prove elusive because many gig workers who are paid by Uber, Lyft, DoorDash, Grubhub, TaskRabbit and the like are living paycheck to paycheck and won’t be able to pay the bill.

“Workers who are underreporting their income now will become guilty of nonpayment next year and subject to penalties and actions by the agency,” Olson said.

Olson added that an IRS collection action “can destroy a person’s life,” as employers can be hesitant to hire someone with a federal tax lien and lenders won’t make loans without charging the highest interest rates.

Etsy, the online marketplace that caters to one-person shops making handmade items like clothing and jewelry, is also lobbying against the proposal. The company was among the signatories on a letter last week to congressional leaders opposing the change, arguing it “will create unexpected challenges for small business owners and entrepreneurs across the Main Street ecosystem.”

An Etsy spokesperson, who didn’t want to be identified in order to speak candidly, said one concern was that in order to supply the necessary tax forms, they’d need to obtain a seller’s Social Security number up front. That could turn away entrepreneurs from using the Etsy platform before they have a chance to grow their business, the spokesperson said.

The new $600 income-reporting threshold for gig workers is also included in the Senate’s substitute amendment to the House-passed relief bill, making it all but certain to become law.

During the late-night debate on the House floor, Rep. Adrian Smith, R-Neb., said Democrats had delayed the vote in part because they “were adding a new cash grab, drastically lowering the threshold at which gig workers” have to report income to the IRS.

“It is like the majority learned nothing from the debacle they created when they shoehorned new [reporting] rules into Obamacare,” Smith said, referring to a $19 billion offset for the 2010 health care law.

That law expanded the $600 reporting requirement for services payments so that goods purchases above that threshold also needed to be reported, such as a business buying lunch for its workers at a local carryout. But after an outcry that requirement was repealed a year later.

Dylan Opalich, a spokeswoman for House Ways and Means Chairman Richard E. Neal, D-Mass., said the new reporting threshold was added to keep the coronavirus relief bill in line with the budget resolution’s deficit ceiling. But she said it was also an overdue policy change.

“Under the present law rules, significant amounts of income goes unreported both to taxpayers and the IRS, and this provision is bringing reporting requirements applicable to large internet platforms in line with the same requirements that apply to main street businesses,” Opalich wrote in an email.

The provision would exempt transactions between individuals using online payment platforms like Venmo or PayPal, or when an individual occasionally sells used items and uses such payment networks.

Employees vs. contractors

There’s a potentially bigger issue at play for third-party networks than just the reporting threshold, however: fear of having to reclassify workers as employees, rather than independent contractors. The dreaded employee designation carries substantial new obligations, such as putting the employer on the hook for payroll taxes and benefits like health insurance.

The industry was shaken last month when the United Kingdom’s highest court ruled that Uber’s drivers were employees and not self-employed independent contractors. That was after Uber and others dodged a bullet in November, when Californians approved a ballot initiative to exempt them from a state law that would have required the same.

And President Joe Biden during his campaign said he would seek enactment of a federal law to end “misclassification” of workers as independent contractors.

Seeking to head off such moves across the country and nationwide, gig economy firms in the last Congress got behind legislation proposed by Sen. John Thune, R-S.D., and Rep. Tom Rice, R-S.C., that would lower the threshold to $1,000, but with a safe harbor to designate workers as independent contractors if certain conditions are met.

According to the IRS, workers subject to payroll withholding and reporting by their employers generally pay about 99 percent of what they owe. By contrast, those whose taxes aren’t withheld and their income reported to the IRS pay about 45 percent of what’s owed. Lawmakers for years have sought to claw back some of that “tax gap” revenue.

That made gig workers an obvious target when lawmakers went looking for easy last-minute offsets, ignoring past attempts to compromise, said Katie Vlietstra, vice president of government relations and public affairs at the National Association for the Self-Employed.

This “dramatic” change is going to be difficult for generally lower-income workers to adapt to, Vliestra said. “Are these the people we actually want to be bringing the full force of the IRS on?”

*By Doug Sword, Roll Call*