Now that your 2021 taxes are done — or at least underway — it’s time to focus on a key tax change for 2022 affecting millions of Americans who earn money through platforms like eBay.,
Venmo and Uber.
This change, which is starting to affect e-commerce, tightens tax reporting on the income of people selling goods and services through online platforms. Starting this year, platforms must submit a Form 1099-K to the Internal Revenue Service declaring an individual’s total income if the platform’s earnings exceed $600.
Now many more sellers, resellers, and gig workers than in the past will have their rig earnings reported to the IRS. The result: They may have to pay taxes they didn’t pay, or keep complex records of why they don’t need them.
Under the previous law, platforms only had to send 1099-K forms if a provider earned more than $20,000 and had more than 200 transactions. The new bar is so low that opponents are trying to get it changed before the platforms send out a storm of confusing tax forms next January.
Here’s what happens. Last year, Congress quietly lowered the 1099-K threshold as part of the American Rescue Plan Act. The goal was to improve tax compliance in an area notorious for lacking it — income that the IRS doesn’t know exists.
According to the agency’s research, tax compliance is highest when employers, financial institutions and others notify the IRS of payments to individuals. These are reported on forms such as W-2 payslips or a set of 1099 forms for other types of income.
Compliance suffers when there are no such reports. The most recent IRS tax gap study found that of $245 billion a year in misreported personal income taxes that are due but unpaid, 45% were for income without a 1099 or similar filing. . Only 4% of the difference came from wage income subject to declaration and withholding at source.
Platforms like eBay, Airbnb, et al. have had to send 1099-K forms to their salespeople for years. But the previous threshold of 200 transactions and $20,000 in revenue left room for significant tax evasion. If the owner of a short-term rental earned $30,000 from 25 rentals in a year, the rental platform did not have to submit a 1099-K form because the owner had made 200 or fewer transactions, even if income exceeded $20,000.
Miguel Centeno, director of Shared Economy Tax, an Austin, Texas tax preparation and advisory firm that serves more than 400 short-term rental operators, says most of his clients want to comply with the law.
But he well remembers one who didn’t. “When he found out his rental income wasn’t going to be reported on a 1099-K form, he asked us not to list it on his tax return,” says Centeno. “When we said we couldn’t, he immediately stopped being a customer.”
The new $600 threshold will likely affect many construction workers who are independent contractors and have not reported income, so paying taxes on that income could be costly. It could also put pressure on the companies that hire them to raise salaries or increase benefits in a tight labor market.
The tax issues are different for many sellers on eBay and similar platforms, especially “casual” resellers who clean out closets and attics. These sellers may not owe tax at all if they sell items for less than they paid or, in the case of items inherited from Grandma, for less than the value of the item on the date of death. They also won’t have to submit a form to the IRS detailing the buy and sell prices of the items, at least for now.
Still, the fear of getting tangled up with the IRS is causing some sellers to back down.
John Biscuti, 36, is a New York-based guitarist who works in a wedding cover band in addition to his day job at a tech company. He enjoys buying, trying out, and then selling vintage guitars for a small profit or loss on Reverb, a musical instrument and gear platform. Now he doesn’t sell at all.
“I want to avoid the tax hassle, and a lot of people I know do too,” says Biscuti. “If I’m selling, I’ll use something like Craigslist, but that means a much smaller market.” Craigslist does not issue 1099-Ks because it does not transfer payments between buyers and sellers.
Alarmed by the effects of the $600 threshold on e-commerce, some members of Congress hope to change the law for 2022. Proposals include repealing the current law and reinstating previous thresholds, or raising the bar from 1099 -K to $5,000.
Nina Olson is a prominent tax expert who supports raising the threshold, perhaps to $5,000. Ms. Olson, the longtime national taxpayer advocate at the IRS, now directs the Center for Taxpayer Rights.
She points out that the $600 threshold for 1099-K forms, which also applies to two other 1099 forms received by the self-employed, stems from a provision from the 1950s that has not been adjusted for the ‘inflation. If that had been the case, those thresholds would now be around $6,000, and she hopes Congress will raise them for all three forms.
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Meanwhile, platforms are switching systems to comply with the $600 threshold. Venmo, the payment app, asks money senders whether the payment is for “friends and family,” such as a share of a restaurant bill, or for “goods and services.”
Only payments for goods and services have purchase protection, and recipients over $600 in this category will not receive their payments until they provide social security numbers or other tax identifiers.
As platforms adapt, sellers, resellers and on-demand workers using them should also check the effects of the new law. There is no guarantee that it will be loose.
Write to Laura Saunders at firstname.lastname@example.org
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