Lower 1099-K threshold may drive out sellers

The lowering of the Form 1099-K threshold from $20,000 to $600 will not only produce millions more forms to be sent to taxpayers, but could also prompt many of them to abandon online marketplaces and gig economy jobs, according to a new survey.

The survey, released Tuesday by the tax software Avalara, comes a week after the Internal Revenue Service announced it would delay the $600 1099-K threshold for another year and phase it in next year starting at $5,000. The American Rescue Plan Act of 2021 lowered the old threshold from $20,000 to $600 as a way of collecting more taxes from people and businesses who receive payments through third parties such as eBay, PayPal, Airbnb, Venmo, Etsy and others, but many taxpayers and tax professionals have worried it would prompt a flood of 1099-K forms arriving in the mail for people who had never been subject to the requirement.

The Avalara survey found that, as a result of the lower threshold, 83% of marketplaces expect sellers to leave their platforms, and a majority (55%) of marketplace sellers and gig workers are reconsidering online selling and on-demand work. Nearly all (90%) of the marketplaces polled believe sellers on their platform are prepared for changes, and a majority (60%) of marketplaces believe that third-party sellers on their platforms are "very" prepared for proposed changes. In contrast, 51% of marketplace sellers indicated they're ready to comply with proposed rule changes.

The IRS is expected to receive 44 million 1099-K forms (up from 14 million) after the threshold is lowered, according to a recent report from the Government Accountability Office. Two-thirds (65%) of marketplace platforms said they plan to deliver 1099-K forms to sellers that meet a new threshold via automated solutions, according to survey results, while a little under half (42%) intend to outsource form delivery to their accounting firm, and 47% of marketplaces would task their internal teams with manually delivering 1099-K forms to sellers that meet a new threshold.

"Our survey data reveals the need for proactive measures on the part of marketplace sellers, on-demand workers, and online marketplaces to determine how best to comply with a revised 1099-K digital payments threshold," said Scott Peterson, vice president of U.S. tax policy at Avalara, in a statement. "Gig workers and sellers anticipating significant impacts from the proposed IRS changes should seek advisory assistance from a bookkeeper or tax/accounting professional around newfound reporting complexity prior to making big decisions. And businesses, bookkeepers and accounting firms can access cloud-based automation solutions that scale with reporting and form preparation and distribution demands associated with a decreased 1099-K threshold."

Tax and accounting professionals will probably be top of mind for marketplace sellers struggling to deal with the upcoming reporting requirements. Nearly half (46%) plan to contact their bookkeeper, tax professional, or accountant to manage the proposed 1099-K rules. Other sellers (40%) intend to figure out the rules on their own, and an equal number plan to reach out to others in the gig/merchant community for guidance.

Only one-third (33%) of the sellers polled said they will look to marketplaces for guidance around the proposed rules. Over half (60%) of marketplaces have already told sellers about the proposed 1099-K reporting requirements, and 15% have gone further to advise sellers around compliance. Two-thirds (65%) of marketplace platforms intend to deliver 1099-K forms to sellers that meet a new threshold via automated solutions, according to the survey.