Tucked inside the American Rescue Act is a tax change that has big implications for tax revenue and the gig economy. Starting for tax year 2022, many contractors with gig economy companies like Uber UBER, DoorDash and Lyft LYFT will be getting 1099 forms when they previously wouldn’t have.
The end result is that many more gig workers can accurately report their income — which, in turn, means that federal and state governments will collect billions more in income tax revenue.
New Income Reporting Threshold for Gig Workers
The new requirement is in Section 9674 of the federal bill and dramatically lowers the annual 1099-K reporting threshold from $20,000 and 200 transactions to just $600 and eliminates the transaction minimum.
The 1099-K form is used for all third party network transactions and payment card transactions. The change means that starting with tax season in 2023, contractors for app-based companies and entrepreneurs who sell goods at places like Etsy and eBay EBAY will receive a 1099-K for any income they received via credit card or other third party payment services when that annual income totals at least $600.
Transactions that aren’t for goods or services (such as earnings on Bitcoin) are exempted from the change.
Billions In Additional Income Tax Revenue
Wendy Walker, a principal for the tax firm Sovos, said the 1099-K change was a surprise, but a welcome one for tax transparency.
“The more transparency in tax, the more revenue can be realized,” she said, noting that lawmakers and watchdogs have advocated for a lower threshold for years. “When the IRS or the taxpayer doesn’t receive a 1099,” she added, “previous federal agency reports have shown that the chance of reporting that income is significantly reduced.”
In fact, IRS Tax Gap studies estimate that when third parties do not provide information to the IRS, 63% of income is misreported. Some 80% of gig economy workers who earn less than $20,000 in a year from a company don’t receive a 1099-K, which translates to tens of billions of dollars a year in potentially unreported income.
Walker added that the federal government estimates it will get a more than $8 billion boost in tax revenue the first effective year and that it “will ramp up over years.”
The tax change also has big implications for state income tax revenue although no estimates are yet available on the potential boost.
Some States Have Their Own Requirements For Gig Workers
Gig workers and companies in some states, however, are already dealing with increased reporting requirements. A total of 12 states plus Washington, D.C. now have created their own 1099-K for gig workers, but the reporting requirements vary. Some states (Florida, Kansas, Oregon and Tennessee) simply match the current federal threshold and only require a 1099-K to be filed at the state level.
The following states and D.C. have established their own thresholds, with some being as low as $600: Arkansas, Illinois, Massachusetts, Maryland, Mississippi, Missouri, New Jersey, Vermont and Virginia.
California is also in the process of creating its own 1099-K form as required by Proposition 22, which passed last year.
Walker said that states without their 1099-Ks will still benefit when the IRS’ new threshold goes into effect as long as they participate in the IRS information sharing program. (The program allows the IRS and participant states and localities to share tax data with each other as a way of increasing tax compliance.)
Measuring The Size Of The Gig Economy Will Get Easier
Walker said there were several motivating factors for lowering the income reporting threshold for gig workers, but the problems with gig worker unemployment insurance in the pandemic was the final straw.
The CARES Act allowed independent contractors and self-employed individuals to file for unemployment insurance, but many of these claimants didn’t receive 1099-Ks. That meant their income had to be substantiated by hand, which takes a long time and caused huge delays with gig workers receiving unemployment benefits.
“That first stimulus bill, it became apparent very quickly that the government had not appropriated enough for unemployment insurance because it’s been unclear how many workers there actually are,” Walker said. “This will give us a much more accurate picture of the size of the gig economy.”