The voices of Tax Policy Center's researchers and staff
Do you Venmo? The online payment platform has 83 million worldwide users and 38 percent of Americans say they use it. This tax year, those Venmo users will need to pay closer attention to their use of the app. That’s because next year, these platforms, including PayPal and Cash, will need to send a Form 1099-K to anybody who received $600 or more in payments related to goods or services during 2023.
The goal is to increase tax compliance and close the tax gap (the difference between what we owe as taxpayers and what we actually pay). However, that’s a steep drop from the former threshold of $20,000 exceeding 200 transactions. The $600 threshold was supposed to go into effect for tax year 2022, but the IRS delayed the change for one year.
At the time, the agency expressed a desire to give filers another year to adapt to the rule. But little other explanation was offered. Two weeks ago, the IRS announced that it had updated its "Frequently Asked Questions" about Form 1099-K, noting the $600 threshold. That might help. But how much, and in what way?
The answer matters not only to the IRS but to small businesses, gig workers, and casual Venmo users. Without better outreach and communication from the IRS, the new threshold might drive more otherwise law-abiding taxpayers to work around the reporting rule. Taxpayers like me.
Broadly speaking, the delayed implementation and communication about following the rule pose at least two problems. Aside from the troubling precedent that the IRS may be able to suspend parts of the tax code at any time in the future, the delay extends the difficulty the IRS faces when determining if gig workers or small businesses are paying the right amount in taxes.
For average taxpayers and casual Venmo users, there are at least two other issues.
Confusion and Clarity
Over the past two months, I’ve asked friends who use Venmo, “Have you heard about the $600 threshold?” Many had not, even though they use the app regularly.
So I (informally and unscientifically) polled three dozen friends about their use of Venmo and their understanding of the new reporting threshold. All but three use Venmo; of those who do, two-thirds use it only for personal transactions. One-third use it for both personal transactions and business.
One-third didn’t know there was a new reporting threshold, and a quarter don’t know what the new rule means for them.
Three responses I received illustrate the difficulty the IRS faces when it comes to determining which people owe taxes.
“I think I’ll owe more taxes,” said one friend who uses Venmo only for personal transactions and not for exchanging money for goods and services.
Another who uses Venmo for business is “looking for an alternative” if their transactions exceed $600.
Yet another noted the ease with which they could run “fundraisers for the [insert high school sports] team using Venmo. The reporting rule is a pain.”
To be clear, the lower reporting threshold is designed to capture the income of workers in the “gig” economy, or those who are not considered employees. Form 1099-K isn’t meant for my daughter and her friend who “Venmo” each other when they share a pizza, or for my friend who reimbursed me for her share of the concert tickets I purchased.
But how many Form 1099-Ks will be sent in error next year? How many Venmo users will have reviewed their account statements and know enough to tell the IRS whether their form was provided in error?
As for my friend’s search for “alternatives,” others may well do the same, exacerbating the problem the IRS is hoping to resolve with this lower threshold – equal tax treatment of income from different sources. Will the new rule accelerate a search for how to avoid reporting financial transactions, perhaps requesting cash reimbursement?
Perhaps a business that relies on gig workers — like a hair salon — will post a sign at the checkout counter saying, “If you use Venmo to tip your stylist, don’t list the service in the description.” That was my hair salon. Should I write “thanks?” Or tap the gift-box icon? I ended up inserting a smiley-face emoji. Does Venmo or the IRS use that information when reporting transactions?
Compliance and Choices
Right now, the IRS estimates the federal average annual net tax gap to be about $428 billion. The one-year delay in implementing the $600 threshold cost the US an estimated $1 billion this tax season.
Gig workers and small businesses could do their best to abide by the $600 reporting threshold. We could all pay better attention to our regular statements provided by these platforms. And if we receive a Form 1099-K, either in error or correctly, we can be prepared. It’s what the IRS hopes for, anyway.
But we might be figuring too much of this out on our own. That could mean more tax avoidance and confusion and more Venmo transactions described with emojis. It’s a tough problem to fix, but the guidance so far isn’t enough to ensure that users of these popular apps know what to do.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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