The Internal Revenue Service (IRS) has announced significant changes to tax reporting requirements that will affect businesses, freelancers, and payment platforms like Venmo. The recently enacted regulations lowered the reporting threshold to $600 of income received through payment apps. This change is a welcome improvement from earlier and it will reduce the burden of paperwork for hundreds of thousands of taxpayers.
Together, these changes go a long way toward fixing the long-standing problem of income being underreported. This chronic underreporting makes a major contribution to the nation’s gross tax gap. In 2022, underreporting in third-party sources resulted in about $539 billion of a total estimated tax gap of $696 billion. From the information reporting and tax withholding perspective, the IRS has recently disclosed that people where substantial information reporting and tax withholding apply to 1% of the gross tax gap from underreporting. That’s a pretty penny, totaling about $9 billion.
Freelancers, contractors, and sole proprietors are the groups that account for the largest percentage of the gross tax gap. They make up 26% or $179 billion of this total, largely because of chronic underreporting. This difference highlights the difficulty that someone who is self-employed might have when it comes to reporting their income.
Changes in Reporting Requirements
Major changes to payment app reporting requirements will go into effect beginning December 31, 2025. Previously, payments platforms were only required to issue 1099-Ks for a user when that user made over 200 total transactions. Second, we needed to find those transactions that exceeded $20,000 in a given tax year. The new law repeals the late amendment to this rule. It brings back the threshold of 200 transactions and $20,000 back to the IRS.
Beginning in 2026, the threshold reporting threshold for payments received for services provided will increase from $600 to $2,000. This new threshold will be adjusted each year for inflation. Hundreds of thousands of small businesses and full-time freelancers who have transactions less than this amount will no longer get 1099-K forms from payment apps and services. This new rule dramatically lessens their dependence on third-party recordkeeping during the hectic tax season.
This change in reporting requirements is projected to lead to a significant reduction in paper work for businesses of all types and sizes. As a result, we find that many of our small business clients and freelancer individuals frequently transact with various vendors for less than $2,000 a year. Without so many third-party records on file, these people will have an easier time figuring out their tax filings.
Implications for Revenue Collection
The IRS’s decision to lower its reporting thresholds is likely to have a significant effect on total revenue collected. The agency needs every individual to accurately report their income in order to determine the appropriate amount of tax owed. Further, the higher reporting threshold has resulted in reduced third-party evidence. As noted above, this is causing fears that the IRS will end up collecting even less revenue net-net.
This modification has opened a large tax enforcement Pandora’s box. For self-employed people and small-biz owners, misuse/auditing focus with respect to self-employment, many cannot prove income audited. This challenge is exacerbated by the lack of trustworthy third-party documentation.
“Virtually every business in the US is impacted,” – Walker
Perhaps, this is one reason why this statement rings true to the far-reaching impacts of these changes across all sectors. It would make filing taxes dramatically simpler for the smallest businesses, likely increasing compliance rates. We remain unconvinced about the long-term effect on net tax revenue.