Outside the Beltway

The Wrong Way to Stop Tax Fraud

Making it harder for the little guy.

James Joyner
18

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YahooNews (“Used PayPal or Venmo? You Could Owe Taxes“):

If you use PayPal, Venmo and other third-party payment networks, then you might get a 1099-K form from the IRS. This form reports transactions from third-party payment networks. And depending on how big your payment is and what it’s for, you may have to file it with your taxes. A financial advisor can help lower your tax liability with a tax planning strategy.

I’m sure. But why should ordinary folks have to pay someone to file their taxes?

At the end of the year, the third-party network fills out a 1099-K form for the users that meet a threshold of transactions. But that threshold is changing in a big way for the 2022 tax year.

As of 2022, third-party payment networks must issue a 1099-K to each user that received more than $600 in payments for the calendar year. That’s a major change from the previous threshold of $20,000.

So, the old rule made sense: If you’re collecting $20,000 from PayPal in a given year, you’re almost certainly a vendor or otherwise using the service to run a business. If you’ve getting 50 bucks a month through the service, it’s likely for personal transactions.

Depending on how you use a third-party payment network, you might not have a business at all. The reality is that many Americans use services like Venmo and PayPal to make splitting bills easier.

For example, your friend might send you $50 for splitting a $100 dinner. In this case, you might receive a 1099-K form. But the “income” reported isn’t really income at all.

If you run into this issue, it’s best to talk to a tax professional about the best reporting methods.

Again, this comes across as an advert for accounting services. Ordinary folks simply shouldn’t need to use an accountant for paying their taxes.

With a growing number of people in the so-called “gig economy,” I’m sure a lot of them are under-reporting their income, if they report it at all. Presumably, the likes of Uber and Grubhub issue W-2s or 1099s to their “contractors.” But if you’re running, say, an eBay store, most of your revenues are probably coming in through PayPal or the like. Maybe $20,000 is too high a threshold for reporting. But you shouldn’t need professional help to avoid declaring personal transactions as business income, either.

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18 responses to “The Wrong Way to Stop Tax Fraud”

  1. Jen Avatar
    Jen

    Yep. File this under unintended consequences.

    The gig economy is a big part of the problem, and I have no doubt that people are under-reporting income.

    Literally all of my income is 1099, and I document all of it. It’s awful that people who are just splitting restaurant tabs are caught up in this, but the other side of the coin is that OF COURSE people shouldn’t be shielding income but likely are.

    2
  2. Modulo Myself Avatar
    Modulo Myself

    600 bucks is what triggers a normal 1099, so that’s where the number is coming from. I’m guessing this will be a non-issue. The IRS certainly knows the difference between getting reimbursed for dinner and selling a service. Or it would be except that people tend to panic re: taxes in this country for no real reason.

    4
  3. Sleeping Dog Avatar
    Sleeping Dog

    Call this the Kyrstin Sinema tax.

    For some, these side hustles have become the new part time job, extra income without the W2. And it isn’t an insignificant amount of money. While $20K is too high, $600 is too low.

    2
  4. Dave Schuler Avatar
    Dave Schuler

    Another argument for replacing the income tax with a prebated VAT.

    2
  5. Modulo Myself Avatar
    Modulo Myself

    After thinking about it a bit more, the real issue might be that Venmo et al never anticipated having to distinguish between 1099 and non-1099 vendors. If you work for Corp X and get reimbursed for 850 in airline/hotel expenses, they will presumably note you as a non-1099 vendor. The question is whether Venmo or Paypal has bothered to do that with every user, or if they tried to create a way of distinguishing between getting 10,000 for a painting and 1000 for a split on an Airbnb.

    1
  6. DK Avatar
    DK

    I don’t care about desperate Uber drivers and Grubhub runners underreporting their measly income when billionaires and megarich corporations are dodging billions in taxes.

    This country’s prorities are out of whack.

    10
  7. Jen Avatar
    Jen

    @DK: Because Uber and Grubhub are run through platforms, the rides/deliveries are traceable and are unlikely what is going on here.

    The things that are less traceable, or where there might be an incentive to hide income, are potentially at issue–service businesses that might not be that small could potentially hide a percentage of their payments by going this route. People can get super-creative when it comes to avoiding paying taxes.

    Yes, our priorities are out of whack re: billionaires and corporations. But people should pay their taxes.

    1
  8. Lounsbury Avatar
    Lounsbury

    @Dave Schuler: Only to gullible ideologues and Americans with no experience with VAT.

    3
  9. just nutha Avatar
    just nutha

    @Lounsbury: That’s my take also, although VAT seems to be the new miracle taxation solution for righties. Still, I didn’t find VAT particularly onerous when I was living in Korea for 8 years. I expect I would get used to it here as a relatively low-income resident of a state with high sales tax already. (I paid both VAT and local sales tax living in Daegu and Seoul, for example.)

    1
  10. Cheryl Rofer Avatar
    Cheryl Rofer

    Ordinary folks simply shouldn’t need to use an accountant for paying their taxes.

    If you mean this to say that the government could just send us all a bill or check on April 15, I totally agree. But we have a convoluted system in which we have to guess what number the government has on us, send in a check or request for refund, and then see what the government numbers are.

    This is, of course, to support the executives of TurboTax and such, and to support the thousands of pages of tax law, from which tax law professionals can’t even make definitive statements about particular situations.

    My income and deductions are pretty straightforward, but I got tired of the many hours preparing my return with TT and decided that paying the local owner of a small business made a lot more sense.

    4
  11. Kathy Avatar
    Kathy

    Mexico has had a VAT (food and medicine are exempt), that started at 10% in the early 80s and is now 16% (Lower at the northern border, I think). We never stopped paying income taxes, nor other fees or taxes.

    1
  12. Sleeping Dog Avatar
    Sleeping Dog

    Some on the Right are supportive of a VAT, but generally conservatives have opposed the change from an income tax, having seen how much money that can be raised and how easy it is to raise the tax. The members of he Right that are supportive, usually have the hobby horse of getting rid of taxes on income.

    Liberals fret about the VAT, because it is regressive.

    1
  13. Andy Avatar
    Andy

    Many tips now flow through Venmo, Paypal, etc., as people use cash less and less often. I was a a friend’s holiday party over the weekend, and they hired a girl to bartend, and she had QR codes for tips.

    The government loves electronic transactions.

    It will be interesting to see if I get 1099-k. I have well over $600 in transactions, and I’m unsure how Venmo or anyone else would know what the vast majority of them were for.

  14. just nutha Avatar
    just nutha

    @Sleeping Dog:

    The members of he Right that are supportive, usually have the hobby horse of getting rid of taxes on income.

    Yes, getting rid of income tax (really on behalf of all the “little people” of course–“not for my sake, why I’d hardly benefit at all”) is usually the rationale. That and tax simplification (again, a gift to the working class so they don’t have to struggle with keeping records and doing all that arithmetic).

    1
  15. Lounsbury Avatar
    Lounsbury

    @just nutha: If you are consumer VAT is nothing of any great particular concern (although it is structurally tending to regressive).

    If you are business in a complex economy – and if you are facing multiple VAT rates (as tends to emerge over time as politicians give into lobbying etc), it is rather more obnoxious than theory would have.

    Nor is it a mechanism that realistically replaces income tax. VAT is obnoxious but perhaps a better tool overall than sales tax (so at least economic theory tells me “all things being equal”).

    Given the emerging issues of wealth concentration, one should rather favour instead of pie-in-the-sky magic wants intergenerational wealth tax – one need not in any fashion be anti-market or anti-capitalism to see that the concentration of wealth via inheritance is a pernicious and negative thing (and indeed yes, such a position is against my self-interest or class interest but it is the long-term economically logical one, a Bismarkian reflexion)

    2
  16. Mu Yixiao Avatar
    Mu Yixiao

    A) This is why I do everything I can in cash. The government has zero business knowing where I spend my money (I pay my taxes, and don’t have any dodges to use; I don’t even itemize–just use the standard deduction).

    B) I’m going to get nailed by this this year. A friend invited me to have drinks with him (in Korea!) and sent me the money for the flight and hotel. It’s only $2k, but that “free” trip is now going to cost me a couple hundred dollars–a car payment or more. That’s a lot for me (and I have a low-end used car). My option is to pay a few hundred dollars in taxes or tell a very good friend I haven’t seen in 12 years “Sorry, I can’t afford your gift”.

    C) We were assured by the Biden Administration that increased enforcement–through mandatory reporting of any transaction sources totaling >$600/year–was being put in place to make sure that rich people paid their fair share. It wouldn’t be used against “average” people. Anyone with half a brain knew that was absolute bullshit.

    Rich people don’t use Venmo or Paypal, they don’t split the bill, and this will affect them exactly zero. This is the the IRS going after “fish in a barrel”–low/middle income people who have zero resources to put up a fight, and for whom a fight would cost ten times the taxes due.

    2
  17. Scott O Avatar
    Scott O

    @Andy: “ I have well over $600 in transactions”
    If you didn’t receive payments in excess of $600, this won’t apply to you. Maybe the bartender at the party will get a 1099-k if she takes in more than $600. If she does next year she will probably have a tip jar to encourage cash tips.

  18. Modulo Myself Avatar
    Modulo Myself

    @Mu Yixiao:

    You know there’s this thing called google. Try typing in something like ‘gift tax’ and see what happens.

    2

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