In the United States’ voluntary tax system, taxpayers are responsible for correctly reporting their incomes to the IRS, rather than having the government determine their taxes owed from the outset.

Information returns are the foundation of that voluntary tax system. They help taxpayers prepare their tax returns and allow the IRS to verify whether returns are correct and complete. But the House Ways and Means Committee recently approved legislation that, if enacted, would put many taxpayers and the IRS in the dark.  

When Congress adopted the modern income tax in 1913, it also authorized information returns. The Bureau of Internal Revenue (predecessor to the IRS) introduced the Form 1099 in 1917, requiring employers to report wages, commissions, and bonuses for employees that earned $800 or more.

Under current law, businesses are required to issue tax forms for workers who are paid $600 or more per year. This includes W-2s for employees, 1099-NECs for independent contractors, and 1099-MISCs for miscellaneous other transactions.

Starting this year, 1099-Ks are required for payments above $600 made through third-party settlement entities. This covers gig worker platforms like Uber and DoorDash, online marketplaces like eBay and Etsy, and payment processors like PayPal and Venmo. Prior to this year, third party settlement entities issued 1099-Ks only for payments above $20,000 and 200 transactions.

The Ways and Means legislation would dismantle the uniform $600 reporting threshold. First, the legislation would increase the 1099-NEC and 1099-MISC threshold to $5,000. Second, the legislation would return the 1099-K threshold to $20,000.

The committee explained that increasing the 1099-NEC and 1099-MISC threshold from $600 to $5,000 “eliminates headaches and unnecessary costs for small businesses by fixing an IRS reporting rule that has not been inflation-adjusted in almost 70 years.”

But there’s no reason why reporting thresholds should be increased over time. The current threshold of $600 is lower than the initial $800 threshold set in 1917, and for good reason. Although prices have gone up in the past 70 years, the relative cost of information reporting has only gone down.

Technology has advanced since the days of handwritten ledgers and paper returns. The most recent evidence suggests that filing 1099s is relatively simple. In fact, information reporting has never been easier, since the IRS just launched a free e-filing tool for 1099s last January. 

If anything, the legislation could make information reporting more confusing because the thresholds for W-2s and 1099s would be misaligned. Small businesses would need to keep track of different thresholds for reporting payments. 

And the higher thresholds for 1099-NECs and 1099-MISCs might tempt more businesses to misclassify part-time employees as independent contractors, causing workers to lose labor protections and benefits. 

The committee also asserted that restoring the $20,000 threshold for 1099-Ks will protect taxpayers that “use Venmo or PayPal to sell items like a used couch, guitar, or concert tickets” and will “ensure Americans aren’t saddled with a mountain of paperwork, confusion, or taxes that they don’t owe.”

But payment processers must only issue 1099-Ks for “commercial transactions,” not the occasional sale of a used item to another person.

The higher reporting thresholds would also create new challenges for gig workers.

Since most 1099 recipients earn less than $7,500 of 1099 income, many workers would no longer receive a 1099-NEC, 1099-MISC, or 1099-K under the new law. But they could still owe taxes on the unreported money. Information returns don’t increase taxes; they only help determine taxes already owed.

However, it’s unlikely those taxes would be paid. More than half of income that is not subject to third-party reporting is not reported on tax returns. By comparison, 1 percent of wage income reported on W-2s is not reported on tax returns. Whether due to an honest mistake or intentional avoidance, most people don’t pay taxes on money for which they don’t receive a tax form.

At first glance, a chance to hide money from the IRS might seem appealing. But it could lead low-income gig workers to lose valuable benefits.

Just like traditional employees have payroll taxes withheld for Social Security and Medicare, non-employees must pay self-employment taxes to qualify for benefits in their old age. These taxes are often the only means of saving for retirement for low-income people, especially for gig workers who lack employer-sponsored or individual retirement plans. They also provide a nearly 6 percent return on investment for the average worker. By paying taxes now, most gig workers can earn more money later.

Without 1099s, workers might also fail to report income necessary to claim refundable credits like the Earned Income Tax Credit and Child Tax Credit, which are a crucial financial support for many low-income families.

The real winners of the proposal would be a constituency that doesn’t need help. The plurality of 1099 recipients are consultants, accountants, and other highly paid professionals who gain more financially from evading taxes than from paying them. For these workers, raising the threshold makes it much easier to under-report income. 

There are real problems to resolve with the taxation of 1099 workers. Some gig workers face high unexpected tax liabilities because they fail to make quarterly estimated payments of self-employment taxes throughout the year. But the solution is not to reduce reporting but to improve tax education, institute automatic withholding of gig income, or expand tax credits for low-income workers.

Some sellers of goods may receive 1099-K reports even though, because of deductible expenses, they have little or no taxable income. But Congress could set a higher 1099-K threshold for businesses that sell goods without altering the threshold for gig workers that only provide services.

Helping small business owners and low-income gig workers is a laudable goal, but haphazardly raising 1099 thresholds does neither. Rather, it would increase compliance burdens, enable tax evasion, and weaken the foundation of our voluntary tax system.