Back in the ’50s, $600 was a LOT of money.
Around this time, tax professionals are nagging their business-owner clients to make sure that they received completed Form W-9s from every nonemployee they paid money to. This is so that they can prepare a Form 1099 to send to the IRS.
As a general reminder, Section 6041 of the Internal Revenue Code requires businesses to file a Form 1099 if they paid a nonemployee at least $600 during the year, provided that the payment had a business purpose. The payment can be listed as nonemployee compensation, rents, royalties, or medical payments, to name a few. To file an accurate 1099, the business will need the payee to complete a Form W-9 listing the payor’s name and the amount paid. The form must be filed by January 31 of the following year.
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These days, $600 is not a lot of money. It is an average person’s monthly food budget. It’s the cost of a PlayStation 5 with one game. In a decade, $600 will be the cost of one law school textbook. So some businesses will have to file numerous 1099s if they make payments to many people and businesses. This can be an administrative burden for those who do not know what they are doing.
But was this level of reporting by small businesses originally intended by the legislature when this reporting law was originally enacted? The $600 reporting rule in Section 6041 has been around for as long as I can remember. So I did some research to find out when this law was originally enacted and what its original purpose was.
The $600 reporting rule was originally enacted as part of the passage of the Internal Revenue Code of 1954 which was a major revision of the tax law. But $600 had a lot of purchasing power back then. According to the Bureau of Labor Statistics website, $600 in 1954 would be worth almost $6,200 in November 2021. A 1953 Corvette cost $3,490. A dollar in the 1950s could buy four gallons of gas, two movie tickets, a week’s worth of subway fares, and six packs of cigarettes.
But wait, there’s more. Section 6041 was a revision of a similar law before the passage of the 1954 code: Section 147(a) of the Internal Revenue Code of 1939. That section stated that all persons must report all payments of $1,000 or more to the government. In 1939, $1,000 was worth about $20,000 today. To put this into perspective, the price of a house in 1940 was between $656 and $3,500 depending on location.
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It appears that when the information-reporting rule was initially released, the legislature only wanted to know about large transactions by any person. But in 1954, the reporting amount minimum was decreased but only required businesses to report payments that were connected to their trade or business. But since then, the government has done nothing, and, slowly but surely, more businesses became subject to this rule.
For new and smaller businesses, this rule can be problematic. First, new businesses might not know about the reporting requirement. Second, assuming they do, some may have a hard time getting some payees to send completed W-9s. And on occasion, a few may submit one with false information. I have heard from people that tax auditors would disallow payments to third parties as business expenses unless they can prove that a Form 1099 was filed. Usually this is resolved by talking to a supervisor or appealing the denial.
Should the reporting requirement be increased to account for inflation? Doing so would help new and smaller businesses avoid the headaches described above. Form 1099s reporting small income would likely be offset by corresponding businesses expenses which would result in no tax owed anyway.
But putting an overly high reporting threshold will result in many transactions going underground. Today, more people are rejecting the traditional employee work and are starting their own businesses. Also, the number of people doing gig economy jobs have increased due to the pandemic, and, in many states, they are treated as independent contractors and not employees. Since typical transactions in these jobs are in smaller amounts, it is very possible that if this income isn’t reported to the IRS, the payees probably won’t report it either. This could result in lost tax revenue, but the loss will probably be negligible considering the relatively small income of most gig workers. Also, Form 1099s are easy to prepare. They are usually e-filed which saves paperwork and postage.
All businesses must file Form 1099s by the end of January. But the $600 reporting rule for payments to nonemployees is almost 70 years old without adjusting for inflation. This has resulted in ordinary payments to be subject to a rule presumably meant for large transactions at the time the law was enacted. Should the reporting amount be adjusted for inflation to maintain the law’s original purpose and reduce administrative burdens for small businesses? Or does the new economy justify leaving the amount as is?
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.