Federal Stimulus Bill Has Huge Tax Change For Gig Workers

Tucked inside the American Rescue Act is a tax change that has big implications for tax revenue and the gig economy. Starting for tax year 2022, many contractors with gig economy companies like Uber UBER -0.9%, DoorDash and Lyft LYFT -1.5% will be getting 1099 forms when they previously wouldn't have.

The end result is that many more gig workers can accurately report their income — which, in turn, means that federal and state governments will collect billions more in income tax revenue.

New Income Reporting Threshold for Gig Workers

The new requirement is in Section 9674 of the federal bill and dramatically lowers the annual 1099-K reporting threshold from $20,000 and 200 transactions to just $600 and eliminates the transaction minimum.

The 1099-K form is used for all third party network transactions and payment card transactions. The change means that starting with tax season in 2023, contractors for app-based companies and entrepreneurs who sell goods at places like Etsy and eBay EBAY +0.6%will receive a 1099-K for any income they received via credit card or other third party payment services when that annual income totals at least $600.

Transactions that aren’t for goods or services (such as earnings on Bitcoin) are exempted from the change.

Billions In Additional Income Tax Revenue

Wendy Walker, a principal for the tax firm Sovos, said the 1099-K change was a surprise, but a welcome one for tax transparency.

“The more transparency in tax, the more revenue can be realized,” she said, noting that lawmakers and watchdogs have advocated for a lower threshold for years. “When the IRS or the taxpayer doesn’t receive a 1099,” she added, “previous federal agency reports have shown that the chance of reporting that income is significantly reduced.”

In fact, IRS Tax Gap studies estimate that when third parties do not provide information to the IRS, 63% of income is misreported. Some 80% of gig economy workers who earn less than $20,000 in a year from a company don’t receive a 1099-K, which translates to tens of billions of dollars a year in potentially unreported income.

Walker added that the federal government estimates it will get a more than $8 billion boost in tax revenue the first effective year and that it “will ramp up over years.”

The tax change also has big implications for state income tax revenue although no estimates are yet available on the potential boost.

Some States Have Their Own Requirements For Gig Workers