As inflation rates continue to hamstring home budgets, many Americans have turned to e-commerce platforms as a way to generate supplementary income. But an updated provision in a 2021 tax-and-spend law would devastate this industry next tax season.
Section 9674 of the American Rescue Plan Act lowered the 1099-K reporting threshold from $20,000 and a minimum of 200 transactions to $600 with no transaction requirement. Online marketplace companies and lawmakers from both major parties have condemned the provision. Some have proposed reverting back to the original rules, while others call to increase the 1099-K reporting threshold to $5,000 or $10,000. In response to this backlash, the Internal Revenue Service (IRS) opted to delay implementation of the new rule for a year-long “transition” period.
Instead of punishing e-commerce sellers through exploitative taxes, the federal government should get out of the way and let them thrive.
E-commerce is giving Americans more latitude to generate income by selling new or used goods to supplement their income. These monies are typically used to pay for food, medicine, and utility bills. It is estimated that American-based casual sellers will have a $1.1 trillion economic footprint by 2024. In the first quarter of 2023, American-based online marketplaces generated over $253 billion. This industriousness should be celebrated, not penalized.
A typical casual seller makes an annual average of $5,000 or less in sales — hardly a profitable target for the IRS. Regular participants are reselling second-hand items they obtained without original receipts. If this rule proceeds next tax season, it will impose a burden of proof on these sellers who could, in turn, be liable for income tax on items sold.
Naturally, this move hasn’t been positively received by the wider public. Sixty-nine percent of casual sellers said they will forgo selling items online altogether. The new process will make platform usage untenable, invite confusion on third-party apps, and create potential overreporting and overpayment of taxes.
These requirements alone would invite unnecessary overhead for casual sellers looking to get by financially. However, the IRS will also instruct these e-commerce websites to require sellers to disclose their Social Security numbers for compliance purposes. This gross privacy violation by a government agency is certain to deter the casual seller looking to make a couple bucks selling an old couch.
Can the IRS be trusted to not overstep its bounds with this 1099-K reporting threshold change? Its track record suggests otherwise.
The Transactional Records Access Clearinghouse, a nonprofit house at Syracuse University, found the agency disproportionately targets lower-income Americans — or those earning under $25,000 annually — five times more than other income brackets. Additionally, a recent Gallup poll found that 60 percent of Americans believe they pay too much in federal income taxes. Moreover, the Biden administration is overzealously targeting casual sellers despite the Government Accountability Office (GAO) finding the IRS responsible for overseeing $2.4 trillion in payment errors across two decades and wasting $247 billion in taxpayer money in 2022 alone.
This doesn’t instill confidence in the embattled agency. As a result, many Americans worry that the so-called Inflation Reduction Act giving the IRS $80 billion to hire 87,000 new agents would go towards unfairly targeting gig workers like casual sellers.
If this provision remains in action next year, the economic hit could crush online marketplaces. The U.S. economy will also feel the impact as it will lose out on economic competitiveness should these platforms become stifled and unusable. Recently, the platform Shopify revealed the United States landed on the No. 1 spot on its inaugural Entrepreneurship Index — followed by Lithuania, Romania, the United Kingdom, and the Czech Republic.
Their report found 1.1 million U.S. jobs were supported by the platform with over $7.3 billion generated annually in exports and a gross domestic product (GDP) valued at nearly $129 billion. In a state-by-state breakdown, Delaware rounded out as the top state for entrepreneurs in this space. Wyoming, California, Montana, and Utah also rounded out the company’s list.
The IRS is overstepping its bounds by harassing online entrepreneurs. The agency would be wise to nix the new 1099-K threshold before it inflicts irreparable harm on taxpayers.
Gabriella Hoffman is a Young Voices Regional Leader and full-time freelancer. Follow her on Twitter at @Gabby_Hoffman.