Is there going to be a new tax applied to transactions involving digital payment platforms like PayPal and Venmo?

That question has been circulating recently in social-media circles, and the answer is no. People who use these digital wallets won’t have to pay an additional tax on money they receive. They’ll just be facing new requirements to pay taxes that they may have grown accustomed to ignoring.

New income-reporting rules are slated to go into effect next year, and it appears that they will affect most people who use these peer-to-peer (P2P) payment platforms for their businesses or freelance gigs.

Major Revamp for the 1099-K Income Reporting Form

Under current rules, people who sell goods or services online and use P2P platforms like PayPal or Venmo generally receive a tax form called a 1099-K from those networks if the platform has processed at least $20,000 worth of payments or at least 200 transactions. The Internal Revenue Service also receives these forms.

But starting next year, the IRS threshold for issuing the 1099-K will drop dramatically to $600 with no transaction level. This is the same threshold that has existed for years for traditional non-W2 freelance income. That form is called the 1099-MISC.

In other words, the new plan is essentially just expanding the reporting requirements to more entities.

But it is sure to shake up how the gig economy operates – because there are a lot of unpaid taxes in the gig economy, and everyone knows it. According to a 2019 report by the Treasury Inspector General for Tax Administration, the “tax gap” between what taxpayers owe and what they pay is a whopping $458 billion, and an equally whopping 15% of that is due to underreported self-employment tax.

The culprit, according to the report, is a lack of reporting requirements in the gig economy: about 63% of income is misreported when third parties don’t provide information to the IRS, such as with a 1099-K.

Uncollected Money and Pandemic Relief

This new $600-threshold, 1099-K requirement was included in the American Rescue Plan Act of 2021 (also known as the COVID-19 Stimulus Package), which was signed into law by President Biden in March.

Why did it appear there? Because Democrats were looking for ways to offset the cost of the coronavirus aid package and set their sights on the large pool of uncollected, gig-economy tax money that lawmakers have been aware of for years. Democrats estimated that expanding the Form 1099 reporting requirements to the gig economy would generate $8.4 billion in additional tax revenue through fiscal year 2031.

The new rule goes into effect for transactions that are settled after Dec. 31 of this year. This means that people receiving payments by P2P platforms won’t be receiving 1099-K forms until early 2023 for all transactions that occurred in 2022.

An important point here is these forms are for taxes that these people would be paying anyway – or at least supposed to be paying. In other words, if you haven’t been attentive in reporting income of less than $20,000 through these P2Ps, you should start thinking about doing so now.

A second important point is that the requirements won’t apply to non-income-related transactions using a P2P, such as splitting a bill or loaning money to a friend. There may be questions about certain transactions and whether they qualify as income or not – CNBC has a useful guide on what constitutes income here.

Huge ‘Tax Gaps’

The new reporting requirements for P2P income are clearly part of an effort by the IRS and lawmakers to crack down on unpaid taxes in the expanding gig economy. The IRS estimates that the overall tax gap is $458 billion, and in a May report the Treasury Department said the tax gap between what employers pay in taxes and what they should be paying is $166 billion a year.

The plan calls for financial institutions and P2P platforms (like Venmo and PayPal) to provide annual reports to the IRS detailing “gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.”

What all this means for a previously lax income-reporting gig worker is that the jig may be up because the IRS will be informed. For many of them, who have had to turn to freelancing and the gig economy to make ends meet, the crackdown is coming at a bad time.

However, it’s worth repeating that the new requirements are not yet in place. They are set to start next year for taxes due in 2023.

There’s time to get ready.