Form 1099-K, Part 2

Watch or listen to the related podcast: https://podcasts.dinesenmedia.com/show/information-return-intelligence-1/form-1099-k-part-2-why-the-600-threshold-was-reversed-2/

In this part of our 1099-K series, I want to talk more about perspectives on 1099-K. Specifically, why the government tried to change the 1099-K threshold to $600, and why there was outcry about this.

Unreported Income

A survey by Avalara (https://newsroom.avalara.com/2025-01-30-Avalara-Survey-Shows-Gig-Economy-Workers-Caught-Off-Guard-by-Lower-1099-K-Reporting-Threshold) conducted when the threshold was set to be $2,500 for 2025 showed:

Clearly, they’re not reporting their gig economy income, and a 1099-K would get them “in the system.” Are we supposed to feel sorry for them?

Tax Pros

I want to be clear that I am not saying “hooray for the government!” here. And, we will have the other side of the story in just a bit.

But first, a word about tax pros and the change to a $600 threshold for Form 1099-K. I feel like tax pros were wildly off-base with their criticisms of the change in the threshold.

There are two legitimate problems with a $600 threshold for 1099-K (which we will get to next). But many tax pros were saying things like “The IRS is coming for your Venmo transactions!”

Play fantasy football and pay your league dues to the commissioner using Venmo? “OMG THE COMMISSIONER IS GOING TO GET A 1099-K!!!!

This kind of breathless commentary was inaccurate. TPSO reporting was, and is, only on business transactions. So no, the IRS was not coming for “everyone’s” Venmo transactions.

There are two legitimate criticisms of the proposed switch to a $600 threshold, as outlined below.

Legitimate Criticism 1: Small Fries

A change to the 1099-K threshold to $600 would have brought a lot more income to light, but it may have been an exercise in futility.

Here’s an example.

This Gal (That Guy’s wife) sells crafts on Etsy. She brings in $1,000 from these crafts. Her cost of goods sold is $900. It’s questionable whether this is even really a business. She’s never bothered to report any of this activity on her and That Guy’s tax return.

With a $600 threshold, she’d get a 1099-K. With the threshold at 200 transactions and $20,000 received, she won’t get a 1099-K.

On the one hand, receipt of a 1099-K would force this activity out in the open.

On the other hand, she basically made no money from this venture. She’d be forced to report the activity, but at what gain to the government?

And along those same lines, the IRS might not even be able to go after her, with something like 32,999,999 (literally — see next section) other 1099-Ks in the system.

Legitimate Criticism 2: IRS System Overwhelm

In 2023, the IRS took in approximately 12.2 million 1099-Ks. Projections by the IRS estimated that this number would almost triple in 2025 to more than 33 million with a $600 threshold. See page 6 of this document: https://www.irs.gov/pub/irs-pdf/p6961.pdf.

Clearly, more income and underground businesses would have been forced into the open with a $600 threshold. But could the IRS really do anything with all those extra forms and information?

Back to our “That Gal” example from the prior section. Say the IRS could automate things, and they auto-generate a letter to her. Almost certainly this letter would assess tax on her based on $1,000 of income. If she’s in the 22% tax bracket, plus self-employment tax, the assessment would be around $345 (if you care to see the calculation, contact me).

That  Gal could then respond with a Schedule C showing $1,000 of income and $900 of cost of goods sold, and something like $22 of tax owed (or $12 if she’s in the 12% tax bracket).

The IRS would then have to process her response, and decide whether to accept her filing as-is and assess $22 (or $12!) against her, or argue that her cost of goods sold should be less, or maybe even argue that it’s not a business (so $0 expenses allowed) and assess $120 or $220 of additional tax.

No matter how you slice it, unless That Gal simply paid the initial assessment without argument, the government would almost certainly lose money on enforcement with any sort of back-and-forth on this.

Which makes it accurate to say, a change in the threshold would often have come at a greater cost than the associated benefit.