The 1099-K is a tax form used to report payments through payment processors such as PayPal and Stripe, as well as independent work marketplace platforms such as eBay, Uber and Upwork. 

Until recently, the IRS only required platforms to send out these forms to people who earned over $20,000 and completed 200 transactions. Therefore, most people paid through such platforms did not actually receive 1099-K at tax time. That means they could easily avoid paying taxes on that income with impunity.

However, as part of the 2021 American Rescue Plan, the 1099-K reporting threshold was substantially lowered to $600 and no transaction minimum. Implementation was initially planned for December 2022, but the IRS delayed it until January 1, 2023 — providing much-needed prep time for both payment platforms and the agency itself. Now, as the final hour approaches, the impacts are imminent. 

Could this regulation get overturned — or  postponed again?

It’s unlikely. The pending Tax Cuts for Working Families Act proposes to revert the 1099-K reporting threshold back to the previous cap of $20,000 and 200 transactions. However, before it can become law, it requires approval from the House of Representatives, the Senate, and the President.

As many as 40M Americans will be impacted

Since much of this income goes unreported today, it’s impossible to predict the total number of Americans who will receive 1099-K forms in January. 

However, Keeper has a unique vantage point on this question, thanks to our partnership program. Over the past year, we’ve had conversations with most of the top 1099-K issuers, including companies like PayPal, Uber, TaskRabbit, Upwork, Turo, and Patreon. Representatives from these platforms estimate that, next January,  65%-95% of the 1099-Ks they issue will go to people who did not receive the form in previous years. 

Another way of phrasing this is that these platforms expect a 3x - 10x increase in the number of 1099-K tax forms that they’ll send out. Given that there were about 11M 1099-K forms issued in 2021, this means tens of millions of Americans will be impacted. The (admittedly biased) “Coalition for 1099-K Fairness” also estimates the number of recipients in the tens of millions.

Keep in mind that the new recipients of these forms will not look like the traditional small business owners who received them in the past. They’ll disproportionately be micro-business owners, side gig workers, individuals selling items on Etsy and Poshmark, and babysitters — people who previously did not report this income.

These people could owe an extra $1,000 in taxes, on average

Let’s say the average amount reported on a 1099-K issued to a first-time recipient is $3,000. That’s not unreasonable, given the range spans from $600 to the old threshold of $20,000.) Then, let’s assume that the average recipient is in a middle-class income bracket of 22% federal and 3% state. Add in the dreaded 15.3% self-employment tax — which applies to everyone regardless of income bracket — and they’ll owe about $1,000 on this income ($4,000 x 35%). That’s going to sting.

To mitigate this, they would need to track and deduct business expenses — something that most side hustlers and micro-business owners don’t take advantage of since it requires diligent bookkeeping and strong knowledge of business taxes.

For example, one of the most commonly missed business tax deductions for those receiving 1099-Ks is platform fees. Every one of the platforms issuing a 1099-K takes a fee for processing services. Sometimes, that fee is small (3% for PayPal), but oftentimes, it’s as much as 40% for rideshare platforms, freelance work marketplaces, and others. Our internal data at Keeper suggests that most taxpayers filing with a 1099-K will forget to deduct even this most obvious of expenses — let alone other categories like home office deductions and business meals.

With their side income no longer escaping the IRS's scrutiny, millions of first-time 1099-K recipients will find themselves burdened by an unprecedentedly heavy tax bill this January — unless they can set up the financial hygiene practices needed to reduce it.