I started a shirt-printing business in college. I wanted some extra spending money, and had always been good at graphic design. After a bit of research, I bought a heat press on Amazon for $200 and taught myself how to print shirts.
Within a few weeks, my dorm room looked like a Bangladeshi sweat shop. T-shirts were strewn across the floor. The 400-degree heat from the press enveloped the room and left it smelling like charred cotton. In time, my armoire became a makeshift darkroom to set stencils for screen printing. I was an objectively terrible roommate. It's a miracle I wasn't reported to the school.
It was a solid hustle. Advertising and word of mouth brought me a modest network of clients on and off campus. Most were intramural or club sports teams. Some were one-off patrons who needed a single shirt or sweatshirt. Within a few months, I had purchased my own domain name, obtained a wholesaler's license, and registered my business with the IRS. I was one of those "risk-takers" they deify on talk radio.
I closed the business after a little more than a year. Mostly, I couldn't stand the accounting. Filing monthly sales-tax reports was a nightmare. If a New York-based client purchased a t-shirt from my Connecticut-based business, should I have applied the Connecticut rate? The New York rate? Both? Maybe the answer is obvious to you. It wasn't to me. The headache wasn't worth the sub-$3,000 annual sums I was dragging in.
My experience gives me some sympathy for the eBay sellers, Etsy crafters, and small businesses subject to the Biden administration's 1099-K rules, which go into effect this year. Enacted as a pay-for clause in the so-called American Rescue Plan, the new rules require third-party payment processors and sales platforms such as PayPal, eBay, Etsy, and Venmo to send users a 1099-K form if they make more than $600 on the platform and report that information to the Internal Revenue Service. Previously, digital sellers were only required to report a user's revenue to the IRS if the user made more than $20,000 and completed 200 or more transactions.
Now, people selling used items on eBay, homemakers with craft stores on Etsy, and roommates who split rent on Venmo will all be subject to increased scrutiny by the IRS if they make a penny more than $600. The rules have the potential to dissuade small-time sellers from using the platforms altogether, driving some to under-the-table alternatives and others out of the market entirely.
While the new rules do not change what users owe in taxes—if you made $750 on eBay in 2020, that was still potentially taxable, despite your not having received a 1099-K—it could give them the impression they owe more than they do. What is more, the rules will effectively require small-time sellers to itemize their expenses. That might be reasonable for a person selling crafts on Etsy, but impracticable for a person selling a microwave he bought six years ago.
"The reporting-threshold change does not change taxes that users already owe, and could also help them by showing what income has been reported to the IRS at tax time," Garrett Watson, senior policy analyst at the Tax Foundation told The American Conservative. "The tradeoff is, it may dissuade some people who may either have a misunderstanding of what the reporting actually means for them (e.g. think it actually is a tax increase), or could encourage some people to avoid taxes by engaging in transactions off the platform."
Watson added that the new rules may require platforms to collect the Social Security information of sellers, which, he said, "could dissuade some users who do not want to disclose this information."
The Joint Committee on Taxation estimated that the new rules would result in more than $8 billion in tax revenue over the coming decade. It's not hard to conceive of where that money might come from: Etsy had upwards of 7.4 million sellers in 2021, most of whom were located in the United States. eBay has about 7 million U.S.-based sellers. Countless more use Venmo and Paypal—not only for business transactions but to reimburse friends for a meal or to split rent payments.
The fact that the 1099-K forms will be issued on the basis of a user's gross revenue means Venmo meal-splitters will have to dig up paper receipts to calculate their net profits and establish a paper trail if auditors dispute their estimates. It may also increase the burdens for "gig economy" workers—ride-share drivers, handymen, and other service workers who collect payments through a third-party platform—to record their expenses, even if they only work their "gig" job on a part-time basis.
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"While this new threshold does not change the tax obligations of gig economy participants, it does increase the importance of accurately tracking and reporting taxable income to the IRS during the tax season," Watson said. "This is because gig workers with a large discrepancy between the income reported on their Form 1099 and the income they report on their return may invite correspondence or audit from the IRS to determine the nature of the discrepancy." Watson added that workers may be called on to "show [their] work" on how they "arrived at their tax liability."
This added headache could dissuade people from entering the gig economy in the first place. It could prevent retirees like this one from selling old possessions on eBay. It will insert government surveillance into ever more marginal parts of the economy—the sale of a used television, or reimbursement for a meal with friends. It subjects transactions outside of the formal economy to government scrutiny, and requires ordinary people to track their expenses over months or years like they are corporations. The burden may turn off would-be users from eBay, Etsy, and Venmo. I've left a business for a lot less.
This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.