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Sunday, March 3, 2024

Why increase the 1099 filing threshold (why increase the tax gap)?


Over the years there have been proposals to increase the filing threshold under IRC §6041 for 1099-MISC and 1099-NEC which has been $600 since 1954. But, as I've posted about before (see for example my 6/11/23 post), increasing the threshold at which an issuer needs to issue one of these forms results in more individuals not reporting their income.

H.R. 7024 passed in the House on 1/31/24 with an important change to delay capitalization of R&D, includes increasing the $600 issuer filing threshold at §6041 from $600 to $1,000 and then adjusting it for inflation annually.  This means that businesses could change their record sorting so they only issue a 1099-NEC if they paid a contractor $1,000 or more during the year rather than $600 or more. 

The Joint Committee on Taxation estimates that this change will cost (meaning reduce tax revenues) by $1.5 billion over 10 years. The income the contractors earn is still taxable. The revenue loss is because some people who earn income but don't receive a 1099 do not report it. I think the reasons are due to either poor recordkeeping or an erroneously - but widely held belief, that if no 1099 or W-2 is received, the income is not taxable. A 2019 TIGTA report (and other government reports) state that if there is no information reporting, the compliance rate is only 37%! That report also indicates that the compliance rate is 93% when there is information reporting.

Why not reduce the cost of H.R. 7024 and remove the change to §6041? This would help it meet principles of good tax policy to not increase the tax gap and to consider transparency (that taxpayers can better understand the tax system (increasing the 1099 filing threshold sends a confusing message to the recipients of these forms and other taxpayers)).

Why not use the $1.5 billion over 10 years to provide education and grants for recordkeeping software to help small businesses implement recordkeeping to track all of their income and expenses and that will also help them reconcile any 1099s, including 1099-Ks they get to they don't overreport income (1099-Ks report gross receipts which might include fees such that a gig platform charges and should be backed out as an operating expense).

What do you think?


Bob said...

Why have a threshold at all?

I understand why, in the days of printers and paper, the need for a threshold existed to make sure the juice was worth the squeeze. But in today's digital marketplace there really should be no reason a company can't require a W-9 for any AP payment to be made.

If that W-9 indicates a 1099 needs to be issued then it should electronically be issued as part of the AP function within a business.

As I'm writing this I am thinking about the landscapers and other service work that is done outside of ERP but anything paid electronically should be without a threshold.

21st century taxation (Annette Nellen) said...

Agree. But some small businesses that only furnish a few 1099s apparently still prefer a threshold. Perhaps with more e-filing of forms, more will find it easier to not have to sort by amount and just issue for anyone they collected the W-9 from. And ideally, it would be terrific with the e-filing with the IRS also sends the 1099 directly to the recipient's IRS online account.

Thanks for the comment.