Bill Overview
Title: Cut Red Tape For Online Sales Act
Description: This bill modifies requirements for third party settlement organizations to eliminate their reporting requirement with respect to the transactions of their participating payees unless they have earned $5,000 or more. A third party settlement organization is the central organization that has the contractual obligation to make payments to participating payees (generally, a merchant or business) in a third party payment network. The bill also requires entities that report income to to issue a plain-language description of the taxability of income reported on Form 1099-K.
Sponsors: Rep. Pappas, Chris [D-NH-1]
Target Audience
Population: Small business owners and individual online sellers globally
Estimated Size: 7000000
- Third party settlement organizations are typically companies that facilitate transactions for online sellers, such as payment processors like PayPal or Square.
- Online sellers, particularly small businesses and individual sellers, use these third party settlement organizations to handle their transactions.
- Previously, these organizations were required to report any transaction over $600 for tax purposes, which added regulatory and paperwork burdens on the sellers.
- By raising this threshold to $5,000, it reduces the administrative burden on smaller sellers who do not earn above this amount annually.
- The requirement for plain-language explanations of tax liabilities related to Form 1099-K income assists taxpayers in understanding their tax obligations, improving financial literacy and compliance.
Reasoning
- The policy is designed to reduce the administrative burden on small online sellers by raising the income threshold for 1099-K forms from $600 to $5,000. This will primarily benefit those small business owners and individual sellers who earn below this threshold by simplifying their reporting requirements.
- The policy also includes a requirement for clear explanations of tax liabilities for income reported on 1099-K forms, improving financial literacy and potentially reducing unintentional errors in tax filings.
- Considering the policy budget, it aims to address millions of small sellers across the U.S., with the potential to significantly enhance the perceived wellbeing of those operating at lower annual income levels from online sales.
- Due to the large number of small sellers who will benefit, the cost of implementing this policy is mitigated by the potential reduction in IRS processing and audit complexities associated with low-income sellers.
- I've included interviews with both impacted online sellers and those who exceed the new threshold to illustrate the varied effects of the policy.
Simulated Interviews
Craft Seller on Etsy (Austin, TX)
Age: 30 | Gender: female
Wellbeing Before Policy: 6
Duration of Impact: 5.0 years
Commonness: 8/20
Statement of Opinion:
- This policy sounds like it will save me a lot of time that I currently spend worrying about tax paperwork.
- I don't make over $5,000 from this business, so not having to handle 1099-K forms is a relief.
- The clear explanation of tax forms will be helpful. I often find tax language confusing.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 8 | 6 |
| Year 2 | 8 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 7 | 6 |
| Year 10 | 7 | 5 |
| Year 20 | 6 | 5 |
Freelance Graphic Designer (San Francisco, CA)
Age: 42 | Gender: male
Wellbeing Before Policy: 7
Duration of Impact: 1.0 years
Commonness: 6/20
Statement of Opinion:
- I generally make over $5,000 but it's nice to know that when I have a slow year, I won't have additional reporting burdens.
- The policy is fair since it helps newcomers and part-timers avoid extra bureaucracy.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 7 |
| Year 3 | 7 | 7 |
| Year 5 | 7 | 6 |
| Year 10 | 6 | 6 |
| Year 20 | 6 | 6 |
Online Seller (New York, NY)
Age: 28 | Gender: other
Wellbeing Before Policy: 5
Duration of Impact: 3.0 years
Commonness: 9/20
Statement of Opinion:
- I was just at the limit before, so this will help me focus more on selling and less on papers.
- Hopefully, the clear tax explanations reduce my mistakes during tax season.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 7 | 5 |
| Year 3 | 7 | 6 |
| Year 5 | 7 | 6 |
| Year 10 | 6 | 5 |
| Year 20 | 5 | 5 |
Retired, Hobbyist Seller (Chicago, IL)
Age: 55 | Gender: male
Wellbeing Before Policy: 6
Duration of Impact: 7.0 years
Commonness: 7/20
Statement of Opinion:
- For someone like me, clarity in tax obligations is more welcome than you might think.
- I like to keep things simple, and this change seems to facilitate that. Sounds great to me.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 6 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 7 | 6 |
| Year 10 | 6 | 5 |
| Year 20 | 6 | 5 |
Photographer (Denver, CO)
Age: 48 | Gender: female
Wellbeing Before Policy: 7
Duration of Impact: 0.5 years
Commonness: 10/20
Statement of Opinion:
- I won't be hugely impacted as I handle all transactions above $5,000 anyway.
- The simpler language might be more beneficial for younger sellers just starting out.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 7 |
| Year 3 | 7 | 7 |
| Year 5 | 7 | 7 |
| Year 10 | 7 | 6 |
| Year 20 | 6 | 6 |
Part-time Online Tutor (Raleigh, NC)
Age: 26 | Gender: male
Wellbeing Before Policy: 5
Duration of Impact: 4.0 years
Commonness: 12/20
Statement of Opinion:
- It's helpful to know I won't need to deal with additional paperwork until my side gig becomes more substantial.
- This revision matches my expectations for easier handling of occasional income.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 6 | 5 |
| Year 3 | 6 | 5 |
| Year 5 | 6 | 5 |
| Year 10 | 6 | 5 |
| Year 20 | 6 | 5 |
Home-based baker (Houston, TX)
Age: 35 | Gender: female
Wellbeing Before Policy: 4
Duration of Impact: 5.0 years
Commonness: 7/20
Statement of Opinion:
- Removing unnecessary filing gives me more time for growing my business.
- The policy helps me focus on customer satisfaction and getting things right.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 4 |
| Year 2 | 6 | 4 |
| Year 3 | 7 | 5 |
| Year 5 | 7 | 5 |
| Year 10 | 7 | 4 |
| Year 20 | 6 | 4 |
Retired, occasional antiques seller (Phoenix, AZ)
Age: 60 | Gender: male
Wellbeing Before Policy: 6
Duration of Impact: 7.0 years
Commonness: 5/20
Statement of Opinion:
- This reduces stress as I don't sell enough for the previous tax burdens.
- I welcome the new transparency and can put effort into better curating my collection.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 6 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 6 | 5 |
| Year 10 | 6 | 5 |
| Year 20 | 5 | 4 |
Student, artist (Miami, FL)
Age: 24 | Gender: female
Wellbeing Before Policy: 5
Duration of Impact: 5.0 years
Commonness: 11/20
Statement of Opinion:
- Good to know when I start selling more, the entry threshold is higher. Presently, I just focus on my studies.
- Understanding taxes better through clear information is also an added bonus.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 5 |
| Year 2 | 6 | 5 |
| Year 3 | 7 | 6 |
| Year 5 | 6 | 5 |
| Year 10 | 5 | 5 |
| Year 20 | 5 | 5 |
Full-time Online Reseller (Los Angeles, CA)
Age: 38 | Gender: male
Wellbeing Before Policy: 7
Duration of Impact: 0.5 years
Commonness: 10/20
Statement of Opinion:
- Since I clear the threshold, this doesn’t directly impact me, but I support anything that simplifies processes for smaller sellers.
- Having simpler explanations of taxes will save me some headaches, even at my level.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 7 | 6 |
| Year 10 | 6 | 6 |
| Year 20 | 6 | 6 |
Cost Estimates
Year 1: $30000000 (Low: $25000000, High: $35000000)
Year 2: $31000000 (Low: $26000000, High: $36000000)
Year 3: $32000000 (Low: $27000000, High: $37000000)
Year 5: $35000000 (Low: $29000000, High: $40000000)
Year 10: $40000000 (Low: $33000000, High: $45000000)
Year 100: $70000000 (Low: $50000000, High: $90000000)
Key Considerations
- The change in reporting threshold reduces administrative burdens on small sellers but may reduce tax compliance and revenue.
- The policy could make tax reporting easier for small businesses, encouraging entrepreneurship and possibly offsetting revenue loss through economic growth.