There Have Been No Adjustment on Form 1099’s $600 Even as U.S. Inflation Soars

In the 1950s, $600 was an enormous sum.

During this period, tax professionals keep reminding their business-owner clients to make sure that they get Form W-9s from each nonemployee they pay.

The Internal Revenue Code Section 6041 requires businesses paying non-employees $600 or more to file a Form 1099, provided that the payment has a business purpose. There are a variety of ways to report the payment, including non-employee compensation, rent, royalties, or medical payments. An accurate 1099 is filed only if the payee provides the business with a Form W-9 indicating the payor’s name and amount paid. By the end of the following January, the form must be filed.

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$600 isn’t a lot these days. Most people spend that much on food each month. You can buy a PlayStation 5 with just one game for that amount. Also, it is estimated that one law school textbook will cost $600 in a decade.

In the original enactment of the $600 reporting law, was this level of reporting intended for small businesses?

In 1954, when the Internal Revenue Code was passed, which was a major revision to tax laws, the $600 reporting rule became law. In those days, however, $600 had a large purchasing power. In 1954, $600 per week would have been worth about $6,200, according to the Bureau of Labor Statistics website. $3,490 would have been the cost of a 1953 Corvette. When the world was a simpler place in the 1950s, a dollar could buy four gallons of gasoline, two movie tickets, a week subway ride, and six packs of cigarettes.

6041 was a revision of the Internal Revenue Code of 1939, which had a similar provision: Section 147(a). It stated that anyone receiving a payment exceeding $1,000 must report it to the government. According to Above the Law, the amount of $1,000 in 1939 was approximately $20,000.

The legislature initially declared that it only wanted to know about large transactions made by anyone when the information-reporting rule was released. In 1954, the reporting amount minimum was reduced, but only payments that were associated with a business had to be reported. But since then, no action has been taken by the government, and more businesses have been affected by this rule.

New and small businesses may have difficulty complying with this regulation. They may not be aware that they must report. Additionally, even if they do, it may be difficult to get some payees to complete W-9 forms. Some may even submit them with inaccuracies. Unless a Form 1099 is filed, tax auditors will disallow business expenses for third parties. A supervisor or an appeal can usually resolve this issue.

Can inflation be taken into account in the reporting requirement? By just doing so, new and smaller businesses could avoid the headaches. For small incomes, Form 1099s would likely be offset by business expenses, resulting in no tax due.

However, putting a high threshold for reporting transactions will lead to many transactions being hidden. More people today are starting their own businesses instead of working for others. More so, in many states, gig-economy workers are treated as independent contractors rather than employees because of the pandemic. Considering that most transactions in these jobs are in smaller amounts, it is common for the payees to not report the income to the IRS. Tax revenue may be lost, but considering how little most gig workers earn, the loss may be negligible. The 1099 form is also straightforward to complete. Usually, these are filed electronically, which reduces paperwork and postage.

It is expected that all businesses will file their Form 1099 by the end of January. While the $600 rule for reporting payments to non-employees is almost 70 years old, it has not been adjusted for inflation. Therefore, ordinary payments bear the burden of a rule intended, at the time the law was passed, for large transactions.