A new survey of marketplace sellers, gig workers, and decision makers at online marketplaces shows that previously proposed changes to IRS form 1099-K reporting requirements would be a threat to their business interests.
The changes, which are presently on hold by the IRS, could include a drop in the reporting threshold from $20,000 to $600. This change would have impacted significantly more marketplace sellers and gig workers. On November 21, the IRS announced a delay in implementing the reduced 1099-K reporting threshold, with plans to phase in a $5,000 threshold for tax year 2024.
The survey found that, as a result of these proposed changes, 83% of marketplaces anticipate sellers to leave their platforms, and a majority (55%) of marketplace sellers and gig workers are reconsidering online selling and on-demand work. The survey also revealed a disconnect in 1099-K readiness, with nearly all (90%) marketplaces queried believing sellers on their platform are prepared for changes, compared to 51% of marketplace sellers reporting readiness to comply with proposed rule changes.
“Our survey data reveals the need for proactive measures on the part of marketplace sellers, on-demand workers, and online marketplaces to determine how best to comply with a revised 1099-K digital payments threshold,” said Scott Peterson, VP, US Tax Policy at Avalara. “Gig workers and sellers anticipating significant impacts from the proposed IRS changes should seek advisory assistance from a bookkeeper or tax/accounting professional around newfound reporting complexity prior to making big decisions. And businesses, bookkeepers and accounting firms can access cloud-based automation solutions that scale with reporting and form preparation and distribution demands associated with a decreased 1099-K threshold.”
Marketplaces and marketplace sellers disagree on readiness for 1099-K changes
Online platforms and their sellers differed on opinions around readiness for the proposed IRS 1099-K threshold change. Of those surveyed, 90% of marketplaces believe that third-party sellers on their platforms are prepared, and a majority (60%) of marketplaces believe that third-party sellers on their platforms are very prepared for proposed changes. In contrast, just over half (51%) of marketplace sellers say they are prepared.
Online sellers, gig workers and marketplaces anticipate material business impacts
As a testament to the perceived impact of the proposed IRS rule change, the survey found a resounding 83% of marketplaces anticipate sellers to leave their platforms as a result of 1099-K compliance issues, and a majority (64%) of marketplace sellers and gig workers are considering alternatives as a result of the proposed IRS requirements and tax implications. And geography matters – sellers and gig economy workers in the Midwest and West (71% and 70%, respectively) are most likely to consider alternatives due to compliance requirements. Those in the South region are least likely (52%).
Notably, a full 55% of marketplace sellers and gig workers surveyed say that the proposed 1099-K rules would impact their decision to continue on-demand work or selling on marketplaces.
Platforms look to automation for 1099-K form delivery
Another significant ramification of the proposed 1099-K changes for businesses is the task of delivering many more of the forms in coming tax years. The General Accountability Office estimates the IRS would receive 44 million 1099-K forms (up from 14 million) following a threshold change. Two thirds (65%) of marketplace platforms plan to deliver 1099-K forms to sellers that meet a new threshold via automated solutions, according to survey results. Just under half (42%) would outsource form delivery to their accounting firm. And 47% of marketplaces would task their internal teams with manually delivering 1099-K forms to sellers that meet a new threshold.
Marketplace sellers look to accounting experts to manage 1099-K compliance
Not surprisingly, tax and accounting professionals will be top of mind for marketplace sellers scrambling to get a handle on the proposed reporting requirements. Nearly half (46%) plan to contact their bookkeeper, tax professional, or accountant to manage the proposed 1099-K rules. Other sellers (40%) plan to either figure out the rules on their own, and an equal number plan to reach out to others in the gig/merchant community for guidance. And just a third (33%) of sellers responded that they’ll look to marketplaces for guidance around the proposed rules. Over half (60%) of marketplaces have already informed sellers about the proposed 1099-K reporting requirements, and 15% have gone further to advise sellers around compliance.