Tax Changes Ease Reporting Burden for Businesses and Freelancers

New tax reporting regulations are set to significantly reduce the reporting obligations for businesses, freelancers, and payment platforms such as Venmo. These changes, enacted under a recent law, effectively reverse previous efforts aimed at increasing IRS oversight of income generated through payment apps and reduce the reporting threshold for non-employee compensation.

The first major alteration reinstates the previous reporting threshold for “third-party settlement organizations.” For years, payment platforms only needed to issue 1099-K forms to the IRS if a user conducted more than 200 transactions in a tax year and those transactions exceeded $20,000. This requirement was modified under the American Rescue Plan Act, which lowered the threshold to $600 and removed the transaction count requirement. Although this change was delayed, it was partially implemented for tax years 2024 and 2025. Now, the new law has reversed these adjustments, reverting to the original 200 transactions/$20,000 threshold.

The second significant change affects how businesses report non-employee compensation. Previously, businesses were required to issue 1099-NEC and 1099-MISC forms to report compensation of $600 or more paid to independent contractors and vendors. This requirement will now increase to $2,000 for payments made after December 31, 2025. This threshold will also be adjusted for inflation annually. As noted by Wendy Walker, a vice president of regulatory affairs at Sovos, this change is substantial and will impact virtually all businesses in the United States.

The overall impact of these changes is a reduction in the amount of paperwork businesses must handle, lowering the risk of penalties from the IRS for late or incorrect filings. The adjustment to the 1099-NEC requirement is particularly beneficial for small businesses. Many small businesses often pay vendors less than $2,000 annually, which could result in a reduction of up to 30% in the number of 1099 forms they need to issue.

Additionally, these rule changes mean that freelancers and contractors will have fewer third-party records to rely on when preparing their taxes. The reduction in third-party reporting is anticipated to lead to a decrease in federal tax revenue as the IRS will have less visibility into income generated by small businesses and independent contractors. According to the Joint Committee on Taxation, these changes could result in a combined federal revenue loss of approximately $13 billion over the next decade, primarily due to increased underreporting of income.

Underreporting of income is a significant factor in the estimated gross tax gap in the United States, which reflects revenue that is legally owed but not paid voluntarily and on time. In 2022, underreporting contributed to an estimated $539 billion of the total $696 billion tax gap, according to IRS data. The report indicated that individuals subject to substantial information reporting and tax withholding, such as regular employees receiving W-2 forms, experienced the lowest underreporting rates. In contrast, freelancers, contractors, and sole proprietors, whose income is less likely to be reported by third parties, accounted for the highest share of underreported income.

These tax changes mark a significant shift in how businesses and freelancers report earnings, potentially impacting the financial landscape for many small operators and independent workers across the economy. As these regulations unfold, the implications for compliance and tax revenue will continue to be a topic of discussion among policymakers and industry stakeholders.