Is the New IRS $600 Reporting Rule a Tax Increase?

The new IRS $600 reporting rule isn’t a tax increase. It’s also not the IRS targeting small businesses and middle-class Americans. It’s just more paperwork.

What’s the new IRS $600 reporting rule?

The IRS has a new 1099 rule for 2022 taxes filed in April 2023.

Update: This rule is causing so many problems that the IRS has suspended most of it until 2023 taxes filed in April 2024. So you may or may not see more 1099s for 2022 income tax returns.

If you receive more than $600 in electronic payments through a service like PayPal or Venmo, you may get a Form 1099-K. (If you accept PayPal payments, read this PayPal Tax Guide.)

Form 1099-K has been around for a few years now, but it used to have a much higher requirement of at least $20,000 and 200 transactions.

The purpose of the rule is to help the IRS track more taxable transactions.

Many people were taking electronic payments and not reporting their income. Sometimes they were paid by a business that was supposed to issue a 1099-NEC but didn’t. Other times they were paid by another person who isn’t required to issue a 1099-NEC under the tax law.

Having the payment processor issue a 1099-K makes sure that the IRS gets the information it needs to track your tax return.

Does the new $600 rule mean you have to pay more taxes?

No, the new $600 1099-K rule is not a tax increase. It also doesn’t make anything taxable that wasn’t already.

If you were properly reporting your income, you won’t pay any more in taxes this year (unless your income went up).

If you weren’t properly reporting your income, you’ll owe the same taxes you owed last year. If you didn’t report all of your income and pay all of your taxes last year, you may want to talk to a tax advisor ASAP.

The IRS has an unlimited amount of time to catch tax evasion and charge you back taxes, interest, and penalties.

What happens if you get a 1099 for personal transactions?

It’s possible that a lot of people are going to get a 1099-K form for personal transactions. They’re not supposed to, but you can thank the cheaters.

Third-party payment networks only have to report business transactions. BUT they know that some of you mark payments as “friends and family” to avoid their payment processing fees.

Some of their accountants are going to tell them to report every penny so they can’t get fined for not meeting their tax reporting requirements. Other financial institutions may not track business versus personal transactions and just assume they’re all reportable transactions.

If you do get a 1099-K it does not mean that you have taxable income.

Form 1099-K is only an informational tax form. It only means that you got $600 or whatever’s listed on the form.

It does not mean that you have to pay taxes on your roommate’s half of the rent.

If you did receive commercial payments, it doesn’t mean that you can’t claim business tax deductions.

When you file your tax return, you’ll report your actual taxable income not what’s listed on your Form 1099-K.

Won’t the IRS send me a letter if I don’t report the income?

There’s a very good chance that if your income is less than what’s on your 1099-K, you’ll get a CP2000 notice or some other letter from the IRS.

All this letter says is, “We think you might owe more in taxes, but we’re not sure so please explain what you did.”

If you received personal payments, you’ll send a letter back to the IRS explaining this, and they’ll probably go away.

Should I attach an explanation to my tax return?

I’m seeing tax accountants go both ways on whether you should attach an explanation to your tax return saying your 1099-K Form has personal payments to avoid getting a letter from the IRS.

The argument for is that you’ll be less likely to get an IRS letter.

The argument against is that you’re usually just supposed to file an accurate tax return. If you attach an explanation, you’ll probably need to file by mail, have your tax return held for review, and have your refund delayed.

The reality is that this year is going to be a mess. People are going to be left wondering where their refund is and why the IRS won’t answer the phone.

Maybe the IRS will make a last-minute change to the tax forms where you can state your 1099-K shouldn’t be taxed. Maybe they’ll do it next year.

Does the new $600 rule target small businesses and the middle class?

The new $600 rule is not an attack on small businesses and the middle class. It does highlight one issue in the tax system.

The less money you make, the easier your tax return is likely to be. The IRS can automatically check every easy tax return that’s filed against the 1099s and other information it has.

If your tax return doesn’t match your 1099, the IRS computer can print out a letter and mail it to you. You can then mail back a response.

You’re very, very unlikely to get called into an IRS office or have an IRS agent want to visit your home. Those more invasive audits are usually reserved for higher net worth people and businesses with more complicated situations the IRS can’t easily check.

So while this particular rule will affect people that weren’t hitting the old $20,000 minimum, it’s not a sign that the IRS is after lower-income tax payers instead of big corporations.