CNN
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“Never mind. Pretend like nothing ever happened.”
That might as well have been the text of one provision in President Donald Trump’s mega tax-and-spending-cuts package that reverses more stringent tax-reporting requirements for payment apps when it comes to telling the IRS how much small businesses and freelancers are taking in via business transactions on their platforms.
The package also contains a new measure for all businesses that issue 1099-NEC and 1099-MISC forms to report to the IRS how much non-employee compensation they pay to vendors and contractors. It’s a change that upends decades of practice. But we’ll get to that in a minute.
The upshot of both changes is this: The IRS will have much less of a view into how much income small businesses and independent contractors make because there will be much less third-party reporting required under the new law.
Worth noting, however: Neither of the changes eliminates the requirement for small businesses, freelancers and contractors to accurately report all their earnings to the IRS on their own tax forms.
First, let’s address the “we’re going right back to the way things were” measure for “third-party settlement organizations” — i.e., payment apps like Venmo.
For many years, those payment platforms only had to issue 1099-K forms to the IRS if a person had conducted more than 200 transactions in the tax year and those transactions combined exceeded $20,000.
But lawmakers under the American Rescue Plan Act had lowered that dollar-threshold to $600 and eliminated the number-of-transactions rule altogether — a change that was supposed to take effect in 2021. It was postponed, however, for a few years and then only partially implemented for tax years 2024 and 2025, when payment apps only had to report a person’s business transactions if they were more than $5,000 in 2024 and more than $2,500 this year.
Well, forget about all that. The new tax law repeals that revision and reinstates the 200 transactions/$20,000 threshold rule.
The second change upends decades of practice and affects businesses of all kinds, said Wendy Walker, a vice president of regulatory affairs at Sovos, a business compliance software provider.
Until now, businesses have been required to issue 1099-NEC or 1099-MISC forms to report to the IRS the non-employee compensation they pay on a one-off basis to independent contractors and vendors throughout the year. Think everyone from the landscaper and cleaning staff to outside legal, accounting or human resource service providers.
The new law raises the required reporting threshold from $600 paid for services rendered to $2,000, starting after December 31, 2025. The $2,000 will be adjusted for inflation annually.
“That is a huge change,” Walker said. And, she added, “virtually every business in the US is impacted.”
The two changes will result in much less required paperwork for businesses to issue. And they will reduce businesses’ risk of being hit with penalties by the IRS if they file a required form late, file it incorrectly or fail to file it at all, Walker said.
The 1099-NEC rule change in particular is likely to offer the most relief to small businesses. Walker noted that plenty of her small business clients have vendors to which they pay less than $2,000 a year, so it could mean up to a 30% reduction in the 1099s they have to issue.
Both rule changes also mean freelancers, contractors and vendors will have less third-party recordkeeping to rely on when they do their taxes.
And that lack of reliable third-party records means the IRS — on behalf of US coffers — will take in less revenue overall. The Joint Committee on Taxation estimated that the two provisions combined could reduce federal revenue by roughly $13 billion over a decade.
That is likely to due to underreporting of income earned. Underreporting of income is a significant contributor to the country’s estimated gross tax gap, which reflects revenue legally owed but not paid voluntarily and on time.
For 2022, underreporting accounted for $539 billion of the estimated $696 billion yearly tax gap, according to the IRS.
The same report noted that the share of the gross tax gap due to underreporting by individuals was lowest (just 1% — or $9 billion) among filers whose income is subject to substantial information reporting and tax withholding. Think your basic W-2 employee with a steady paycheck.
By contrast, the highest share of the gross tax gap due to underreporting (26% — or $179 billion) came from those whose income is least likely to be subject to third-party reporting (e.g. freelancers, contractors and sole proprietors).
