IRS Again Delays New Reporting for Gig Workers and Independent Contractors

Transcript of Podcast Episode 259

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, IRS Again Delays New Reporting for Gig Workers and Independent Contractors.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) into law. Many of the ARPA provisions were to provide financial and economic assistance in light of the COVID-19 pandemic. For many Americans, the pandemic is now in the rear-view mirror. Yet, several of the ARPA provisions will continue to have an impact. One such provision will impact many gig workers and independent contractors, and rather than being helpful, may potentially cause hardship.

Prior to ARPA, many individuals were engaged in various business endeavors on a part-time, freelance, or independent contractor basis, such as selling merchandise or offering services through websites. In many cases, this was done to supplement income, but in others, they became full-time activities. Companies like Venmo, PayPal, Etsy or eBay were only required to send information returns (“IRS Form 1099-K”) for gross payments to the vendor exceeding $20,000, and when more than 200 transactions occurred within a calendar year. Penalties for failure to provide the information return or to withhold taxes when required, could be significant.

One of the provisions of ARPA was to lower that reporting requirement to $600. The original effective date of this provision was January 1, 2023, for reporting on transactions in 2022, but the IRS opted to treat 2022 as a transition year. In a news release, IR-2023-221, the IRS estimated that more than 44 million Form 1099-Ks would be issued because of this new requirement and many taxpayers would not be expecting it.

The Government Accountability Office (“GAO”) has been critical of the IRS’s collection and use of information returns, stating that they are supposed to be used to identify potential fraud and noncompliance, including the failure to file tax returns when required. However, the “IRS lacks centralized leadership to make strategic decisions related to the use of information returns across the agency.”[i] The GAO further stated that “despite IRS communication efforts, it also may exacerbate confusion among some taxpayers, such as gig workers, who may not understand the taxability of their payments and taxes owed. For example, some of these taxpayers may not know how to calculate profit or loss and may not understand the information reported on the form. This puts them at risk of inaccurately reporting their incomes to IRS or not meeting their tax obligations.”

This confusion among taxpayers, tax professionals, and payment processors has caused the IRS to further delay complete implementation of this new ARPA rule. Instead, the IRS will also treat 2023 as a transition year so, the old rules still apply. However, starting in 2024, the reduction in the monetary limit will be phased in starting at $5,000. The IRS announced this on November 21, 2023 in Notice 2023-74.

Gig workers and independent contractors should ensure that they maintain good records in 2024 and work with their tax and legal advisors to ensure they address this issue, given their unique situations. Employers and web businesses must ensure that workers and transactions are classified correctly and that all requirements of ARPA are followed.

[i] Government Accountability Office. “Tax Enforcement: IRS Can Improve Use of Information Returns to Enhance Compliance.” Gao.gov https://www.gao.gov/products/gao-24-107095 (Accessed November 15, 2023)

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