If your side hustle yields more than $600 on Venmo this year, the Internal Revenue Service will soon know your identity and expect you to report any taxable income.
Popular peer-to-peer payment apps like Venmo, Paypal or Cash App are now required by law to report to the IRS their users’ 2022 business transactions if they exceed a combined total of $600 in a year. The companies will send 1099-K forms to users to inform them of their total taxable income. Failure to include these forms with your tax return could trigger an IRS audit.
Some private sector business leaders have called for the rule to be delayed due to confusion among the general public. Congressional Republicans are also concerned the rule violates Americans’ privacy rights.
Etsy, eBay and small retailers have formed a group to lobby for the protection of “casual online sellers and microbusinesses from unfair tax and privacy burdens.” Coalition for 1099-K Fairness argues the new law will confuse Americans who have had little time to prepare for the change.
“It’s really confusing. It’s a really bad policy,” Etsy CEO Josh Silverman told the media. The coalition hopes to change or delay the new rule before it takes effect next year. They estimate that as many as 40 million Americans will get a 1099-K form this January to include with their 2022 taxes.
Republicans say the rule change is evidence of Democrats reneging on a promise to not raise taxes on low and middle-income Americans.
During his 2022 State of the Union address, President Joe Biden promised not to raise taxes on households making less than $400,000 annually and called for higher taxes on the wealthy.
“Under my plan, nobody earning less than $400,000 a year will pay an additional penny in new taxes,” Biden said.
“The one thing all Americans agree on is that the tax system is not fair,” he continued. “That’s why I’ve proposed closing loopholes so the very wealthy don’t pay a lower tax rate than a teacher or a firefighter.”
The reporting threshold was lowered from $20,000 to $600 as part of the American Rescue Plan Act, passed by Congress in March 2021. Democrats pushed the bill through without any Republican votes. Subsequently, in the summer of 2022, Congress passed the Inflation Reduction Act which, among other things, earmarked $80 billion dollars for the IRS to hire more agents and bolster existing enforcement mechanisms.
“They said they weren’t going to hassle anybody at low income levels. That it was going to all come out of the hide of big companies,” Sen. Mike Braun, R-Ind., told Fox Business recently.
“The people in the gig economy or running a side business are going to be hassled down to any $600 transaction,” Braun said. “Do you think the main thrust of this big $80 billion investment with 87,000 agents is going to be turned on big companies, or unleashed across the countryside on small income earners?”
Democrats in Washington plan to hire an army of 87,000 IRS agents so they can audit more Americans like you.— Kevin McCarthy (@GOPLeader) August 11, 2022
That’s more than the entire population of Joe Biden’s hometown of Scranton, PA.
House GOP Leader Kevin McCarthy also accused Biden and the Democrats of amassing an “army of 87,000 IRS agents so they can audit more Americans like you.”
This “army” of new IRS agents has become a flashpoint in Washington politics recently.
In August, Treasury Secretary Janet Yellen attempted to reaffirm the President’s fidelity to his State of the Union promise in a letter to the IRS commissioner.
“Contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” Yellen wrote.
Bipartisan calls for reform
There does seem to be some bipartisan agreement that the lower reporting rule should be adjusted. The question is if Congress will change it before or after the 1099-K forms go out.
Sen. Bill Hagerty, R-Tenn., sponsored a bill called the “Stop the Nosy Obsession with Online Payments Act of 2022 (SNOOP), which would change the threshold back to $20,000. Hagerty called the tax code law an invasion of privacy.
A number of Republicans, including Sen. Kevin Cramer of North Dakota, are also backing the “SNOOP” Act because they feel it violates personal privacy. “The federal government should not be able to snoop on taxpayers’ personal transactions,” he said. “Our bill will undo their plans to spy on Americans’ personal finances and violate their privacy.”
Another bill, the Cut the Red Tape for Online Sales Act, would raise the reporting threshold to $5,000. The bill is sponsored by Democratic Sen. Maggie Hassan of New Hampshire and nearly half a dozen Democratic senators.
Although it appears there is political appetite among both Democrats and Republicans to change or delay the rule, it hasn’t appeared yet in end of year legislation.
New tax or new reporting rule?
The IRS reminded small business owners about the lower online earnings threshold last month in a comprehensive explainer post. “The Internal Revenue Service reminds taxpayers earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.”
Congress’ new rule doesn’t technically raise taxes, but rather represents an increase in the amount of information the IRS receives regarding an individual’s income. Typically the IRS knows how much an individual earns because their employer reports the income on an employee’s W-2 form. Those earning money via payment app transactions have been able to slide under the radar, which this rule change is supposed to stop from happening.
Previously payment apps didn’t have to report users’ transactions to the IRS unless they reached the threshold of $20,000 or there were more than 200 separate business transactions in a calendar year. Now that will change.
“I think it will come as a shock out of nowhere that people are getting these,” Nancy Dollar, a tax lawyer, told Fox Business last week.
The new rule is expected to affect millions of taxpayers who have been underreporting their gross income to the IRS. The Pew Research Center estimates that nearly one in every four Americans earns extra income by selling products online, doing gig work or receiving rent for property they own. Often they are paid through online payment apps.
Business earnings v. Splitting dinner with a friend
This doesn’t mean all payment app transactions totaling $600 in a year will trigger a report to the IRS. The rule only applies to payments received for goods and services. So paying a friend for your share of dinner, sending a family member birthday money or sending a roommate your share of rent is not taxable income and will not be included in the report. There are other exceptions as well, including if an individual sells an item at a loss.
But the babysitter who makes more than $600 in a year via payment app transactions? That must be reported.
Some experts are concerned this could have a chilling effect on individuals participating in the labor market by moonlighting or through “side hustles.” Alex Muresianu, a federal analyst at the Tax Foundation, told the media: “The administrative burden of figuring out taxes for something like that is such a pain, some people may decide it is just not worth it. And I doubt the IRS is going to be making a lot of revenue on taxing people’s $10,000 side hustle.”