1099 threshold is too low and needs to be raised
The federal government needs to get real when it comes to setting the thresholds for businesses to have to issue 1099 forms to contractors.
Current federal rules regarding when 1099 tax forms must be issued are unrealistically low and present a significant burden to businesses with the costs associated with tracking, filing and mailing the additional forms.
Under current law, if a business pays an independent contractor a cumulative total of more than $600 over the course of the year the business must issue the contractor a 1099 form. For banking things get even sillier with banks required to produce and mail out 1099 tax forms for anyone earning $10 or more in interest income.
The federal government wants to take this nonsense even further with requiring third party cash apps such as Venmo and Paypal to issue 1099s for those who receive more than $600 in transfers. That paperwork nightmare was paused at the 11th hour last December.
The ridiculous banking rule has been in place since 2008 but the 1099 rules for contractors was changed in 2021. Prior to that time, a business needed to pay out a much more realistic $20,000 (and 200 transactions) before needing to send out a 1099.
The intent of the change was to ensure that everyone pays their fair share when it comes to income taxes. The people being paid, whether it is the middle-schooler mowing your lawn, the teenager watching your children this summer, the driver delivering your lunch order, or the contractor re-roofing your building are responsible for reporting all income earned on their taxes.
According to the IRS, people aren’t very good at doing this and by their estimates, people underestimate taxable income to the tune of $1.33 trillion on federal income tax returns with about 69% of that projected to be on business income.
The 1099 process serves as a check on underreported income, since the IRS also receives copies of them to check against the amount contractors claim (or don’t claim) on their taxes.
While tightening the reins on who should get 1099s makes sense, the arbitrarily set $600 limit is far too low. Increasing the threshold to $1,500 or $2,000 and indexed to inflation would make more sense in getting to the people who will exceed the income level to actually have to file taxes.
Likewise the threshold for the 1099 issued for interest income should be raised to at least $100 to make it worthwhile for the time and effort involved in doing the paperwork and mailing it out.
Having the IRS chasing pennies in the pockets of people cutting grass or emptying trashcans when billionaires are paying next to nothing, is like having police officers out measuring people’s grass as part of the lawn patrol rather than taking down drug dealers and pedophiles.
Closing loopholes to make it easier to catch scofflaws and swindlers makes sense, but the current rules have gone too far and put an unrealistic and outsized burden on small businesses.
