The Type 1099’s Minimal $600 Reporting Requirement Is Virtually 70 Years Previous With out Adjusting For Inflation

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Unrecognizable mature man holding US Dollar bills

Again within the ’50s, $600 was a LOT of cash.

Round this time, tax professionals are nagging their business-owner purchasers to ensure that they acquired accomplished Type W-9s from each nonemployee they paid cash to. That is in order that they will put together a Type 1099 to ship to the IRS.

As a normal reminder, Part 6041 of the Inside Income Code requires companies to file a Type 1099 in the event that they paid a nonemployee not less than $600 in the course of the 12 months, supplied that the fee had a enterprise objective. The fee could be listed as nonemployee compensation, rents, royalties, or medical funds, to call a couple of. To file an correct 1099, the enterprise will want the payee to finish a Type W-9 itemizing the payor’s title and the quantity paid. The shape should be filed by January 31 of the next 12 months.

Nowadays, $600 will not be some huge cash. It’s a mean individual’s month-to-month meals price range. It’s the price of a PlayStation 5 with one sport. In a decade, $600 will probably be the price of one regulation college textbook. So some companies must file quite a few 1099s in the event that they make funds to many individuals and companies. This may be an administrative burden for individuals who have no idea what they’re doing.

However was this degree of reporting by small companies initially supposed by the legislature when this reporting regulation was initially enacted? The $600 reporting rule in Part 6041 has been round for so long as I can keep in mind. So I did some analysis to search out out when this regulation was initially enacted and what its authentic objective was.

The $600 reporting rule was initially enacted as a part of the passage of the Inside Income Code of 1954 which was a significant revision of the tax regulation. However $600 had numerous buying energy again then. In accordance with the Bureau of Labor Statistics web site, $600 in 1954 could be price nearly $6,200 in November 2021. A 1953 Corvette value $3,490. A greenback within the Fifties might purchase 4 gallons of gasoline, two film tickets, per week’s price of subway fares, and 6 packs of cigarettes.

However wait, there’s extra. Part 6041 was a revision of an analogous regulation earlier than the passage of the 1954 code: Part 147(a) of the Inside Income Code of 1939. That part said that each one individuals should report all funds of $1,000 or extra to the federal government. In 1939, $1,000 was price about $20,000 as we speak. To place this into perspective, the worth of a home in 1940 was between $656 and $3,500 relying on location.

It seems that when the information-reporting rule was initially launched, the legislature solely wished to find out about giant transactions by any individual. However in 1954, the reporting quantity minimal was decreased however solely required companies to report funds that have been linked to their commerce or enterprise. However since then, the federal government has achieved nothing, and, slowly however certainly, extra companies turned topic to this rule.

For brand spanking new and smaller companies, this rule could be problematic. First, new companies may not know concerning the reporting requirement. Second, assuming they do, some might have a tough time getting some payees to ship accomplished W-9s. And occasionally, a couple of might submit one with false info. I’ve heard from those that tax auditors would disallow funds to 3rd events as enterprise bills except they will show {that a} Type 1099 was filed. Normally that is resolved by speaking to a supervisor or interesting the denial.

Ought to the reporting requirement be elevated to account for inflation? Doing so would assist new and smaller companies keep away from the complications described above. Type 1099s reporting small earnings would possible be offset by corresponding companies bills which might end in no tax owed anyway.

However placing a very excessive reporting threshold will end in many transactions going underground. At the moment, extra persons are rejecting the standard worker work and are beginning their very own companies. Additionally, the variety of individuals doing gig economic system jobs have elevated because of the pandemic, and, in lots of states, they’re handled as impartial contractors and never staff. Since typical transactions in these jobs are in smaller quantities, it is extremely attainable that if this earnings isn’t reported to the IRS, the payees in all probability gained’t report it both. This might end in misplaced tax income, however the loss will in all probability be negligible contemplating the comparatively small earnings of most gig employees. Additionally, Type 1099s are straightforward to organize. They’re often e-filed which saves paperwork and postage.

All companies should file Type 1099s by the tip of January. However the $600 reporting rule for funds to nonemployees is nearly 70 years outdated with out adjusting for inflation. This has resulted in unusual funds to be topic to a rule presumably meant for big transactions on the time the regulation was enacted. Ought to the reporting quantity be adjusted for inflation to keep up the regulation’s authentic objective and cut back administrative burdens for small companies? Or does the brand new economic system justify leaving the quantity as is?

Steven Chung is a tax legal professional in Los Angeles, California. He helps individuals with fundamental tax planning and resolve tax disputes. He’s additionally sympathetic to individuals with giant scholar loans. He could be reached through e-mail at Or you possibly can join with him on Twitter (@stevenchung) and join with him on LinkedIn.

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