Taking a Lemonade Stand: The Entrepreneurial Case for Returning the Form 1099-K Reporting Threshold to its Pre-American Rescue Plan Act of 2021 Level

Posted on by MBELR

By Jack Weykamp

In March 2021, President Biden signed the American Rescue Plan Act of 2021 into law (“The Act”). 1 The main purpose of the Act was to address the economic impacts of the COVID-19 pandemic by providing direct payments to Americans, extending enhanced unemployment benefits, and by increasing the Child Tax Credit.2 However, the Act also included an amendment to the Internal Revenue Code that dramatically expanded the number of users of third-party settlement organizations (“payment processors”) that would have their transaction information automatically forwarded to the IRS via a Form 1099-K.3 As a result, taxpayers who make use of payment processors like Venmo, Etsy, and Ticketmaster are now at risk of having a new complication added to their taxes each year. (1099-K form: Everything you need to know, H&R Block, https://www.hrblock.com/tax-center/irs/forms/what-is-form-1099-k/ (last visited Mar. 8, 2023).)) This change represents not only a new burden for millions of American taxpayers, but also a substantial barrier to entry for microbusinesses that rely on these payment processors to begin operations. The IRS has temporarily delayed implementation of the new requirement to the 2023 tax year, citing a desire to give taxpayers time to prepare.4 This delay is a step in the right direction, but Congress should take legislative action to return the reporting threshold to its pre-Act level to avoid chilling the entrepreneurial spirit of prospective microbusiness owners across the United States.

Prior to the Act, payment processors would only be required to send Form 1099-Ks to users who received payments totaling at least $20,000 over at least 200 discrete transactions in a given year.5 If both thresholds were met, then the user and the IRS would receive a copy of the Form 1099-K directly from the payment processor that would detail the user’s transactions over the course of that year.6 Under the Internal Revenue Code as amended by the Act, the threshold to trigger payment processors to send a Form 1099-K to the user and IRS has been lowered dramatically to $600 in total payments received in a given year, with no requirement that a certain number of discrete payments be received.7 Under this new rule, a user of Venmo who during a tax year received only a single payment from selling a bicycle totaling $600 would have a Form 1099-K sent to them and to the IRS by Venmo detailing the transaction. Under the prior rule, that same user would have needed to receive an additional 199 payments totaling at least $19,400 in that tax year to trigger the requirement. This rule change, however, does not expand the universe of payments that are potentially considered taxable income. It is strictly related to when a Form 1099-K is produced and sent to users of payment processors.8 The Venmo user selling the bicycle for $600 would still be required to pay income tax on any gains made on the sale above what they paid for the bicycle originally under both the pre- and post-Act reporting thresholds.9 

A core rationale underlying the change in the Form 1099-K reporting threshold was that providing the IRS with independent information about taxpayers’ income would decrease the amount of business income that goes unreported.10 The Joint Committee on Taxation estimated in 2021 that the lowering of the reporting threshold would drive an additional $8.4 billion in tax receipts over the next decade.11 However, the reduced reporting threshold provision has met significant opposition both in Congress and from industry groups.12 To date, much of the concern regarding the lowered reporting threshold has centered around the complexity the requirement adds for millions of American taxpayers who make use of payment processors and have never had received a Form 1099-K in the past.13 These concerns were reflected in the IRS’s December 2022 announcement delaying implementation of the requirement until the 2023 tax year, which cited a desire “[t]o help smooth the transition and ensure clarity for taxpayers, tax professionals, and [the] industry . . . .”14 The costs of additional complexity being placed on taxpayers alone is sufficient to warrant congressional reconsideration of the lowered reporting threshold, but there is another negative impact of the change that has not yet received adequate attention: the chilling effect the automatic reporting threshold has on entrepreneurial exploration.

            Imagine a hypothetical Instagram user, Ellie, who has a hobby of creating custom, inexpensive earrings and enjoys sharing her creations on her profile. Before long, her custom pieces attract the attention of friends and family across the United States who express interest in purchasing her pieces at a price that will yield just a few dollars of profit per unit. Ellie is not a sophisticated business owner but is easily able to mail her earrings to customers and take payment over her Venmo account. However, there is a problem – Ellie also uses her Venmo account for a variety of personal payments, including receiving her roommate’s portion of the rent each month, which easily puts her over the $600 Form 1099-K reporting threshold. Ellie has heard about the Form 1099-K rule change and realizes that the costs of added complexity to her taxes that would result from selling her custom earrings far exceeds any profits she would earn, and as a result, chooses not to sell her creations at all. Regardless of the reporting threshold for the Form 1099-K, Ellie would be responsible for taxes on any gains from the sale of her custom earrings, and this blog in no way advocates for the non-reporting of taxable business income. However, the imposition of the dramatically lowered Form 1099-K reporting requirement presents a flashing red warning sign for prospective entrepreneurs like Ellie that threatens the wrath of the IRS for failure to properly report miniscule amounts of income.

            This decrease in market entry by entrepreneurs as the result of the regulatory burden is supported by the National Bureau of Economic Research, which found that “costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry.” 15 Entrepreneurs like Ellie, who would utilize payment processors for their first tentative steps into operating a business, are almost certain to be doing so in an otherwise high entry industry: small startup costs, no licensing requirements, and little other government oversight, and are therefore more likely to be dissuaded by the lowered Form 1099-K requirements.16 In addition to the kinds of businesses that are being dissuaded by the Form 1099-K requirement, concern should be directed to the kinds of entrepreneurs that are being discouraged by the rule. According to a survey conducted by the Morning Consult, over half of Gen Z respondents expressed concern about the tax implications of the new rule, and over two thirds of respondents to the Coalition for 1099-K Fairness’ survey indicated that they are likely to stop selling, or to sell less online because of the new requirements.17

            While the prospective microbusinesses that may be impacted by the lowered reporting threshold are individually small, their collective impact on the U.S. economy is enormous. Microbusinesses, defined as enterprises employing less than five individuals including the owner, make up 92% of all U.S. businesses.18 This scale is reflected by the fact that in 2011 microbusinesses accounted for an estimated $135.5 billion in tax revenue across the state, local, and federal levels, or approximately 13.1% of total business taxes paid that year.19 The substantial tax revenues from microbusinesses are even more impressive considering the high failure rate associated with new ventures.  According to the Small Business Administration, only a third of new businesses survive past the ten-year mark.20 The high rate of business failure requires constant new entrepreneurial ventures that grow and achieve some measure of profitability in order to maintain these tax receipts. 

            The lowering of the Form 1099-K reporting threshold threatens market entry by imposing potentially significant costs, such as professional tax preparation services, early in a new business’s lifecycle.21 According to a U.K. study, over half of new business owners that began operations informally (i.e., operating without formally registering the venture) did so to test the viability of their business.22  The lowered automatic reporting threshold robs nascent entrepreneurs of the opportunity to test their business models prior to incurring the costs associated with business formalization. As a result, market entry will be more costly at an earlier stage and therefore require entrepreneurs to take on additional risk as they begin operations. Less market entry is the natural and predictable consequence. 

            The informal nature of the microbusinesses that will be dissuaded by the lowered Form 1099-K requirement makes estimating the impact of the rule on the overall economy difficult if not impossible. However, the more stringent reporting requirement is slamming the door on a valuable first foothold into the marketplace, especially for young entrepreneurs, and threatens $135.5 billion in annual tax receipts in exchange for $8.4 billion over the next decade.23 It is true that requiring payment processors to report a greater volume of transactions to the IRS will reduce the amount of unreported business income in the United States and increase tax receipts, but it is equally true that increased tax revenue comes at the cost of greater barriers to entry to the American economy for entrepreneurs like Ellie. Rather than seeking to squeeze every taxable dollar out of small businesses, Congress should recognize that raising the Form 1099-K limit to its prior level will allow the taxation blind spot to serve as an incubator for nascent entrepreneurs who will ultimately drive economic growth. This notion of turning a blind eye towards fledgling businesses is not a novel one, but rather is informed by a great American institution: the lemonade stand.

For decades, the lemonade stand has been a fixture of American neighborhoods in the summertime, serving the dual purpose of providing refreshment to communities and to teaching the values of hard work and entrepreneurship to children at a young age. Efforts to regulate lemonade stands have been met with condemnation, inspired pro-lemonade stand state legislation, and have even inspired one major lemonade mix company to pay the fines of any children who run afoul of the law in the operation of their stand, in a program humorously dubbed “legal-ade.”24 The widespread pushback against lemonade stand regulation reflects an implicit belief that the value of nurturing the entrepreneurial spirit outweighs the benefits of strict adherence to a regulatory regime. This belief is predicated on the notion that instilling the entrepreneurial spirit early and easing its exercise will generate long term benefits to society by empowering the next generation of entrepreneurs. The same principle that animates our near unconditional support for the lemonade stand operating within a regulatory blind spot should be applied to the Form 1099-K reporting threshold. The hope that the child running a local lemonade stand on a hot July afternoon will one day grow up to be a captain of industry and employ hundreds within her community is equally applicable to prospective microbusiness owners like Ellie.

There is no telling whether a microbusiness selling products via Instagram, Venmo, and the U.S. Postal Service will ever grow to any sort of substantial scale, employ members of the community, or ever turn a profit. But in the rare instance that an entrepreneurial spark turns from idea, to tentative first steps, to a small but profitable enterprise utilizing a payment processor, it is this blog’s hope that the proprietor of that business reports their income as taxable, even if they fall below the pre-Act automatic reporting threshold. However, it is naïve to think that all this income would be reported. More taxes owed are certain to go unpaid with the higher pre-Act threshold, but at the same time a higher threshold will encourage more of these microbusinesses to begin operations, to grow, and to generate revenues far more than $20,000 each year. These successful businesses will outgrow payment processors and be forced to hire additional taxpaying employees to sustain their growth. If the cost of this entrepreneurial foot in the door, multiplied across thousands of prospective entrepreneurs like Ellie overs the course of the next decade is a $8.4 billion, that is a cost worth paying. Raising the automatic reporting threshold to its pre-American Rescue Plan Act of 2021 level will allow prospective entrepreneurs to return to making the lemons of this IRS blind spot into entrepreneurial lemonade. 

  1. American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4 (codified as amended in scattered sections of 15 U.S.C., 26 U.S.C., and 42 U.S.C. ↩

  2. American Rescue Plan, white house, https://www.whitehouse.gov/wp-content/uploads/2021/03/American-Rescue-Plan-Fact-Sheet.pdf (last visited Mar. 22, 2023. ↩

  3. 26 U.S.C. § 6050W (2019) amended by 26 U.S.C. § 6050W (2021). ↩

  4. IRS announces delay for implementation of $600 reporting threshold, I.R.S. (Dec. 23, 2022), https://www.irs.gov/newsroom/irs-announces-delay-for-implementation-of-600-reporting-threshold-for-third-party-payment-platforms-forms-1099-k. ↩

  5. Jasmin Suknanan, What you need to know about next year’s $600 reporting rule from the IRS, CNBC (Feb. 18, 2023), https://www.cnbc.com/select/irs-600-reporting-rule-delayed; 26 U.S.C. § 6050W (2019) amended by 26 U.S.C. § 6050W (2021). ↩

  6. Jasmin Suknanan, What you need to know about next year’s $600 reporting rule from the IRS, CNBC (Feb. 18, 2023). ↩

  7. 26 U.S.C. § 6050W (2021). ↩

  8. Ashlea Ebeling, Get Paid Online? Here’s How to Tell if You Owe the IRS Taxes, WSJ (Feb. 13, 2023), https://www.wsj.com/articles/sell-on-ebay-or-get-paid-on-venmo-you-probably-owe-the-irs-taxes-e97172e0. ↩

  9. Understanding Your Form 1099-K, I.R.S., https://www.irs.gov/businesses/understanding-your-form-1099-k (last visited Mar. 23, 2023). ↩

  10. Laura Saunders & Richard Rubin, IRS Delays Gig-Tax Filing Rule for Side Hustles of More Than $600, WSJ (Dec. 23, 2022), https://www.wsj.com/articles/irs-delays-gig-tax-filing-rule-for-side-hustles-of-more-than-600-11671815725?mod=article_inline. ↩

  11. Id.; Joint Comm. On Taxation, 117th Cong., JCX-14-21 (2021). ↩

  12. SNOOP Act, S.3546, 117th Cong. (2022); Samantha Handler, EBay, Lawmakers Push to Change Tax Reporting Rule in Lame Duck, Bloomberg Tax (Dec. 2, 2022), https://news.bloombergtax.com/daily-tax-report/ebay-lawmakers-push-to-change-tax-reporting-rule-in-lame-duck. ↩

  13. Ashlea Ebeling, Get Paid Online? Here’s How to Tell if You Owe the IRS Taxes, WSJ (Feb. 13, 2023), https://www.wsj.com/articles/sell-on-ebay-or-get-paid-on-venmo-you-probably-owe-the-irs-taxes-e97172e0; Ryan Ellis, If You Dread the IRS Now, Wait Until You Get a 1099-K, (WSJ Mar. 31, 2022), https://www.wsj.com/articles/internal-revenue-service-taxes-irs-1099-k-form-tracking-payment-transactions-credit-card-venmo-privacy-breach-cybersecurity-11648745007; Amber Gray-Fenner, After Congress Fails to Act, IRS Delays Onerous New 1099-K Reporting For Payment Platforms, Forbes (Dec. 23, 2022), https://www.forbes.com/sites/ambergray-fenner/2022/12/23/after-senate-fails-to-change-law-irs-grants-reprieve-to-1099-k-filing-requirement/?sh=3b5a2865754b. ↩

  14. IRS announces delay for implementation of $600 reporting threshold, I.R.S. (Dec. 23, 2022), https://www.irs.gov/newsroom/irs-announces-delay-for-implementation-of-600-reporting-threshold-for-third-party-payment-platforms-forms-1099-k. ↩

  15. Leora Klapper Et. Al., Entry Regulation as a Barrier to Entrepreneurship 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 10380, 2004), https://www.nber.org/system/files/working_papers/w10380/w10380.pdf. ↩

  16. What is a Barrier to Entry? Linkedin News (Nov. 28, 2022), https://www.linkedin.com/pulse/what-barrier-entry-get-ahead-by-linkedin-news/; Leora Klapper Et. Al., Entry Regulation as a Barrier to Entrepreneurship 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 10380, 2004), https://www.nber.org/system/files/working_papers/w10380/w10380.pdf. ↩

  17. Amanda Jacobson Snyder, Most Adults Aren’t Worried About Income Tax Liability for Online Payments. Gen Zers Are the Exception, Morning Consult (Feb. 23, 2023), https://morningconsult.com/2023/02/23/concerns-about-income-tax-liability-for-online-payments/; Coal. for 1099-K Fairness, https://bipac-momentum-media.s3.amazonaws.com/Media/assets/000/035/087/original/coalition-for-1099-K-fairness-2021-survey-results-report.pdf (last visited Mar. 23, 2023). ↩

  18. Bigger Than You Think: The Economic Impact of Microbusiness in the United States, Ass’n for Enter. Opportunity (last visited Mar. 28, 2023), https://aeoworks.org/wp-content/uploads/2019/03/Bigger-than-You-Think-Report_FINAL_AEO_11.10.13.pdf. ↩

  19. Id. ↩

  20. Frequently Asked Questions About Small Business, Small Buis. Admin. (Aug. 2018), https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-Questions-Small-Business-2018.pdf. ↩

  21. Leora Klapper Et. Al., Entry Regulation as a Barrier to Entrepreneurship 1 (Nat’l Bureau of Econ. Rsch., Working Paper No. 10380, 2004), https://www.nber.org/system/files/working_papers/w10380/w10380.pdf; Ashlea Ebeling, Get Paid Online? Here’s How to Tell if You Owe the IRS Taxes, WSJ (Feb. 13, 2023), https://www.wsj.com/articles/sell-on-ebay-or-get-paid-on-venmo-you-probably-owe-the-irs-taxes-e97172e0. ↩

  22. Colin Williams & Alvaro Martinez, Is the informal economy an incubator for new enterprise creation? A gender perspective, 20 Int’l J. of Entrepreneurial Behav. & Rsch 4, 4 (2013). ↩

  23. Amanda Jacobson Snyder, Most Adults Aren’t Worried About Income Tax Liability for Online Payments. Gen Zers Are the Exception, Morning Consult (Feb. 23, 2023), https://morningconsult.com/2023/02/23/concerns-about-income-tax-liability-for-online-payments; Bigger Than You Think: The Economic Impact of Microbusiness in the United States, Ass’n for Enter. Opportunity (last visited Mar. 28, 2023), https://aeoworks.org/wp-content/uploads/2019/03/Bigger-than-You-Think-Report_FINAL_AEO_11.10.13.pdf; Joint Comm. On Taxation, 117th Cong., JCX-14-21 (2021). ↩

  24. Helen Jung, Sweet ending: Girl at center of lemonade stand controversy makes almost $2,000, headed to Disneyland, The Oregonian (Aug. 10, 2010), https://www.oregonlive.com/portland/2010/08/girl_at_the_center_of_lemonade.html; Governor Signs Hayli’s Law to Protect Lemonade Stands from Illinois Government, Illinois Policy (July 12, 2021), https://www.illinoispolicy.org/governor-signs-haylis-law-to-protect-lemonade-stands-from-illinois-government; Dalvin Brown, Country Time offers to pay fines for kids operating unlicensed lemonade stands, USA Today (June 21, 2019), https://www.usatoday.com/story/money/2019/06/21/country-time-legal-ade-lemonade-stand-fines/1521478001/. ↩

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