Millions of US Taxpayers are weeks away from receiving a Form 1099-K they have never had to deal with before when filing their taxes next year.
What you need to know: A small provision in the American Rescue Plan Act of 2021, which provided economic relief for American families and businesses impacted by the Covid pandemic, requires companies that process financial payments to issue a Form 1099-K to its users if they received $600 or more from the platform.
The provision was supposed to make it easier for contract workers to file and pay their share of taxes on the income they received.
However, the real-world impact of this law affects anyone that has sold something on eBay or other online marketplaces that process payments, including on used items that are typically not subject to income tax.
In addition, the new requirement has created a lot of confusion around Person-to-Person payments services such as PayPal, Venmo, and Block’s Cash App.
These payments apps are popular for splitting a restaurant bill, small cash gifts on birthdays, or reimbursing friends or family for other expenses, again, not typically subject to income tax.
And while the IRS acknowledges that most of these types of transactions are not taxable, marketplaces and payments platforms will be issuing 1099-Ks in January to comply with the new regulation.
What has changed: Prior to the tax year 2022, the federal threshold for companies to issue a Form 1099-K to its users was $20,000 and 200 transactions.
But that all changed with the new provision in the American Rescue Plan that now says companies must send Form 1099-K when a user received more than $600 in payments in a year.
Why it matters: While anyone that profits from a sale or providing a service, no matter how small, had to report the net profit (after eligible deductions for expenses) on their tax return and pay taxes — regardless if they were issued a 1099-K or another tax form — this new law requires taxpayers to deal with this form, without little guidance on how to dismiss monies received that are not taxable.
For example, if you purchased a laptop two years ago for $1,900 and sold it on eBay for $700, eBay will send you a Form 1099-K for $700.
And especially this year, with inflation causing more Americans to dig through their garages and closets to sell items for some extra cash, sellers will receive a 1099-K if their sales combined to more than $600 over the year.
eBay CEO Makes Last-Minute Pitch to Congress to Change the Threshold
Fortune published commentary today written by eBay CEO Jamie Iannone making a strong case this needs to be changed now with only days left in the legislative session. Here are the highlights from his public pitch to Congress.
“Many Americans need extra cash today, not tomorrow, next week, or next year. This is where online marketplaces play a critical role.
“For millions, these marketplaces are more than just shopping platforms: they are an economic parachute helping to fund critical everyday needs such as food, medicine, and utility bills.
“Those people will find themselves in a real bind should Congress fail to address a major change to the tax reporting requirements for online sales before the end of the year.
“The vast majority of Americans selling online are not running businesses, but rather are casual sellers who occasionally sell used or pre-owned goods to make a little extra money.
“However, the lowering of the 1099-K threshold from $20,000 in annual payments (and 200 transactions) to just $600 does the opposite of the legislation’s intended goals and will cause confusion, increased cost, and tax overreporting for those Americans who need the extra income the most.
“A survey of ecommerce sellers that had less than $20,000 in online sales last year found nearly half are selling online to pay for necessary personal expenses such as medicine, housing, and clothing.”
“While the IRS considers the sale of second-hand goods for less than the original purchase price to be non-taxable income, casual sellers would have the burden to prove to the IRS that they earned no taxable income from those sales.
“And, if they don’t have proof of the original price, then they could be liable for income tax on those sales.
“eBay urges Congress to immediately raise the reporting threshold to a more reasonable figure that would maintain access to online marketplaces for all Americans without undue burdens, additional expense, or fear of making a tax misstep.”
The irony behind this situation is that Congress knows this is a problem and there have been bills introduced by both parties to rectify the 1099-K reporting threshold.
There is bi-partisan support to find a fix, even if the thresholds differ between the bills, either bill would provide a huge benefit to most taxpayers.
In addition, a group of Republican lawmakers recently urged the IRS to delay the implementation of the new regulation in a letter sent to the acting commissioner of the IRS, Douglas O’Donnell.
“We are strongly opposed to the changes made to the de minimis reporting threshold, and we urge you to delay implementation of this disastrous policy for at least one calendar year,” the group wrote.
Furthermore, the letter asks the IRS to answer 13 questions to address the ambiguities and fallout of the new reporting requirement, from how taxable income is identified to how much this is going to cost the agency to enforce this new regulation.
There is little time left in the lame duck session before Christmas to fix this problem. But now is the time before eBay and hundreds of other marketplaces and payments providers have to issue 1099-K forms to its users.
Take action: eBay has also urged its sellers (but any taxpayer can do it – no eBay account necessary) to write their members of Congress to demand to change this law now. To facilitate the urgency, the company has a ready-to-go letter that is sent electronically in seconds available here.
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