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Why the IRS announcement Raises Concerns Over Gig Worker Misclassification
The IRS Fact Sheet 2025-08 reflects the Agency's decision maintaining the Form 1099-k reporting threshold at $20,000 and 200 transactions for 2025. While the decision reduces confusion for many online sellers and hobbyists, it creates a blind spot for many gig workers. Gig worker misclassification as independent contractors rather than employees shift tax burdens, reporting duties, and legal responsibilities on to individuals rather than employers. A higher 1099-K threshold may reduce paperwork for some taxpayers, but it also reduces transparency, allowing employment misclassification to remain hidden and exposing some to audit risk while employers avoid compliance.
What's the Difference Between a Form 1099-K and a Form 1099-NEC?
Earnings from gig platforms do not arrive on the same type of tax form. The IRS treats the Form 1099-K and the Form 1099-NEC very differently. Third party settlement organizations (TPSOs) such as payment apps or marketplace platforms, issue the Form 1099-K to report payment card and third-party network transactions. Under the current rules, a Form 1099-K is only required when a worker exceeds $20,000 and 200 transactions in a year. Form 1099-K does not specifically confirm that someone is an employee or an independent contractor. Form 1099-NEC reports compensation paid to an independent contractor directly by a business and must be issued for $600 or more in payments. A Form 1099-NEC is the form a business provides if a worker is properly classified as an employee or independent contractor.
How does the $20,000 Threshold Reduce the Visibility of Potential Gig Worker Misclassification?
The decision to keep the 1099-K threshold at $20,000 means that many gig workers never trigger a reporting requirement. Employers misclassifying employees as independent contractors may skip issuing 1099-NECs as their workers may not understand the rules or recognize the misclassification. In this scenario, the IRS does not receive a 1099-NEC or a 1099-K, so it has no insight into the relationship between the worker and the business. This reduces the likelihood that the IRS identifies gig worker misclassification. Further complicating the matter is the discrepancy between the $600 1099-NEC threshold, and the $20,000 1099-K threshold allows businesses to hide behind the TPSO reporting rules, even when these rules may not apply.
What are the Risks of Gig Worker Misclassification?
Misclassified workers face tangible financial and legal consequences, especially when workers never receive the proper forms to report income. Misclassified workers are at risk of being audited as when the IRS obtains earnings data; it may appear that the worker failed to report income despite the employer's noncompliance. Misclassification can also bring on unexpected tax liabilities for misclassified workers as they could be responsible for full self-employment tax rate, meaning they pay both the employer and employee Social Security and Medicare taxes. Workers improperly treated as contractors lose rights to employee benefits and protections. Gig worker misclassification makes it harder for workers to prove income or employment status.
What Enforcement Actions Remain Active Despite the Threshold Delay?
The IRS has clarified that delaying a lower 1099-K threshold does not pause broader enforcement efforts. The agency will still be conducting worker classification audits alongside outreach and enforcement related to the gig economy. These measures, alongside whistleblower-driven investigations, ensure that there are still legal risks for employers who misclassify workers.
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