1099-K forms can be confusing, especially when sellers receive them for the first time. If you sell on your own website or on an online marketplace like eBay, Etsy, Amazon, etc. that manages payments for you, by now you should have received an IRS 1099-K form for your online sales transactions if you met federal or state threshold requirements.
This year seems to have created more questions among online sellers about this form as the IRS announced last year it would lower the threshold on when the 1099-K form is issued.
But that change applies for sales in 2022 only, not in 2021. So, that may be a small piece of relief for some sellers even so sellers are responsible for paying taxes on profits regardless if they received a 1099-K. I will address this here as well.
In addition, this year, many eBay sellers received their first 1099-K form from the marketplace as the company fully transitioned to managing its own payments in 2021 and are now considered a Third-Party Settlement Organization (TPSO). This means some eBay sellers may receive multiple 1099-K forms, from eBay and Paypal.
In this article, I will discuss the 1099-K form, focusing specifically on eBay and other marketplace sellers which are solopreneurs or sole proprietors.
Sellers that operate as other legal entities, such as an LLC, Partnership, Corporation, etc, have different tax and legal requirements, and while experienced owners of these entities may be able to file their own taxes, this article is somewhat of a “beginners guide” meant for newer sellers that operate as a sole proprietorship.
Payment Processor vs Third-Party Settlement Organization
First, let’s get a little into some differentiation between types of payment processors. The IRS differentiates between payment card transaction providers (ie credit card processors) and Third-Party Settlement Organizations (TPSO) but considers both a PSE (Payment Settlement Entity).
While both payment card transaction providers (credit and debit card merchant processors) and TPSOs have to issue 1099-K forms, TPSOs do not have to issue a 1099-K unless the user of the TPSO meets a transaction threshold requirement.
Because I am focusing on 1099-K forms issued by marketplaces that are also Third-Party Settlement Organizations (TPSO), I may use those terms interchangeably.
Some of the information here may also apply to other PSE entities, but my focus is not on those situations which means, I may not discuss some specifics that may apply to those other entities.
Now, before I move on, I want to point out that I am not an account or lawyer. This is not accounting, tax, or legal advice. The information I present is general business advice based on my business experience and my interpretation of reputable resources that discuss and explain the IRS 1099-K within the Marketplace TPSO context.
I added a resource section to the bottom of this article that can provide you with more details on this topic.
For first-time sellers that received a 1099-K form, I strongly suggest you seek professional help from a reputable accountant that understands your tax situation. Depending on your tax situation, you could end up saving more on taxes than the cost of the accountant.
Also, many accountants offer a free introductory session to discuss your tax situation, which may help you determine if the cost to hire the accountant is worth the tax savings.
What Is a 1099-K Form?
The 1099-K came into existence in 2009 as part of the 2008 Housing Assistance Tax Act, yet the form has nothing to do with housing. That’s the government for you 🙂
The purpose of the form is to inform the IRS how much money was transacted on your behalf selling online or through a credit card processor. Over the years, the form has created a bit of confusion because it didn’t seem to fit neatly into one of the many 1099 categories people were most familiar with.
When people hear of 1099 forms, they typically know about 1099-MISC, 1099-INT, 1099-DIV, 1099-B, and 1099-G forms. But there are actually 16 versions of the 1099 form in 2021.
- 1099-A: Acquisition or Abandonment of Secured Property
- 1099-B: Proceeds From Broker and Barter Exchange Transactions
- 1099-C: Cancellation of Debt
- 1099-CAP: Changes in Corporate Control and Capital Structure
- 1099-DIV: Dividends and Distributions
- 1099-G: Certain Government Payments
- 1099-H: Health Coverage Tax Credit (HCTC) Advance Payments
- 1099-INT: Interest Income
- 1099-K: Merchant Card and Third Party Network Payments
- 1099-LTC: Long-Term Care and Accelerated Death Benefits
- 1099-MISC: Miscellaneous Income
- 1099-OID: Original Issue Discount
- 1099-PATR: Taxable Distributions Received From Cooperatives
- 1099-Q: Payments From Qualified Education Programs (Under Sections 529 and 530)
- 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Because people are more familiar with the type of 1099 forms that involve untaxed income such as interest, dividends, or unemployment, for which generally there are few if any deductions, taxpayers often end up paying the full tax on the reported income on those forms.
That is probably why some sellers seem shocked when they receive their first 1099-K form from a marketplace like eBay or Etsy and inaccurately believe they now must pay income tax on the entire reported amount.
My goal with this article is to try to demystify the 1099-K form a little and help sellers realize that common business expenses can easily reduce their tax burden.
When Does a TPSO Have to Issue a 1099-K Form?
For the 2021 tax year, the IRS requires TPSOs to issue a 1099-K form when the gross payments or payments transacted through the platform exceeded $20,000 and 200 transactions for the year.
However, sellers that reside in one of the following states, will receive a 1099-K form from a TPSO based on a lower threshold because the state threshold is different than the IRS threshold.
- Alabama – $1500
- Arkansas – $2500
- District of Columbia – $600
- Illinois – $1,000 and 4 or more transactions
- Maryland – $600
- Massachusetts – $600
- Mississippi – $600
- Missouri – $1200
- New Jersey – $1000
- Vermont – $600
- Virginia – $600
Unfortunately, that will be changing for next year (2022 tax year).
Effective for the tax year 2022, as part of The American Rescue Plan Act of 2021, the IRS will require TPSOs to issue a 1099-K form if the transaction amount exceeds $600, regardless of the number of transactions.
This lower threshold for 2022 is controversial because it may require small sellers to keep detailed sales and expense records, placing an undue burden on them. eBay is lobbying Congress to fight this new threshold requirement for 2022, but at the moment, that seems like a long shot.
In addition, many people will receive 1099-K forms when they use popular cash apps like PayPal, Venmo, or Square’s Cash App even for personal transactions. (more on that later)
Do I Have to Declare Income Even if the TPSO Didn’t Issue a 1099-K?
That depends. If you only sold personal items, that is items you purchased for more money than you sold on eBay for example, then you do not have to report those sales as income.
The key point is that these are occasional sales, not part of a regular pattern to make money (run a business), and you are not making a profit on those sales.
But, if you purchased items for resale or made a profit selling an old item (like a collectible – even if it was a personal item), or you purchased goods to make items (on Etsy for example), then you will have to report the profit from that sale on your tax return as income, even if you did not receive a 1099-K.
Because of the new lower threshold in 2022, some micro sellers that skirted the law and never reported their income previously may end up with a 1099-K form next year. This “sudden” exposure may clue the IRS into looking for potential tax cheats from previous years.
The IRS makes a big distinction between Tax Evasion (illegal and criminal) and Tax Avoidance. Not reporting taxable income is tax evasion, so the new threshold could trigger audits looking for taxpayers that didn’t declare taxable income from online sales.
Do I Pay Income Tax on the Amount Reported on a 1099-K Form?
As I mentioned earlier, this is one of the biggest misunderstood fears when sellers receive their first 1099-K form. The typical answer is you do not pay taxes on the full amount reported on 1099-K forms as you most likely have legitimate business expenses (deductions) that will reduce your tax burden.
Usually, as a sole proprietor and you will have to file a Schedule C (Form 1040) with your tax return. Schedule C has spaces for you to enter applicable business expenses (Part II Expenses) to reduce your income.
In rare cases, you may even have a loss, which could help you lower your overall tax burden. But then why are you in business?
To give a quick example. Assume you sold $25,000 on a marketplace like eBay and your expenses totaled $20,000, your actual income would be $5,000 and you would pay tax on that $5,000.
In most cases, that means you also have to pay so-called self-employment taxes, which are actually Social Security and Medicare taxes that an employer usually would pay.
If you are employed and receive a W-2, you usually pay half of those taxes already on your regular paycheck. But when you are self-employed, you will pay the full amount, which currently is 15.3%. There are caps on these payments for high earners, but most people probably won’t hit the caps.
I Have Personal and Business Sales on My 1099-K – How Do I Separate Them?
Commingling or mixing of personal and business finances creates headaches for accountants. This is one of the biggest problems “accidental” entrepreneurs face when they start selling personal items on an online marketplace, but then turn that into a business.
You want to separate your personal sales from your business sales as soon as possible to minimize the commingling of your money flow.
This will become more important next year when the IRS 1099-K reporting threshold is reduced to $600 as you may receive many 1099-K forms from various TPSOs, including online marketplaces, PayPal, Venmo, or other P2P (Person to Person) cash applications.
Therefore, best practices to avoid the commingling of personal and business finances include:
- Use separate online marketplace accounts to sell personal and business items. Do not use the same account for both and see point 4 here in this list.
- Use separate bank accounts for business and personal use and transfer monies from business sales only into the business bank account.
- Consider using accounting software such as QuickBooks, FreshBooks, Xero or similar to track your sales and expenses. Many accountants can help small business owners set those up and save fees when preparing taxes.
- Consider turning your business into an LLC or corporation which has additional benefits of protecting your personal assets from business liabilities. But there are costs involved to maintain these separate entities. You can stay a sole proprietorship, but to separate your personal and business finances, you want to get an Employer Identification Number (EIN).
EIN? Woah, you may ask. I don’t plan to employ anyone, so why would I need this number instead of using my social security number?
The primary reason is that if you operate multiple accounts on an online marketplace, the 1099-K from the marketplace will combine the transactions from all accounts under one Taxpayer Identification Number (TIN).
Therefore, if you use your social security number for both business and personal sales, you will receive a 1099-K that combines both types of sales into one 1099-K.
If you use an EIN for your business, you will receive a 1099-K for your business transactions processed through your dedicated business account(s) on the marketplace and a 1099-K for your personal transactions through the dedicated personal account(s) on the marketplace. Again, assuming you meet the required threshold for the marketplace/TPSO to issue the 1099-K.
Again, you do not have to have employees to receive an EIN. But this is where it gets into some legal stuff that is best discussed with an accountant that can help you make the right decision under what legal entity your business should be operated as.
A Word on PayPal, Venmo and Similar P2P (Person to Person Payments) Apps
I just mentioned in this section that cash apps like PayPal or Venmo will have to issue 1099-K forms for the second time in this article.
Because it is a bit unclear right now how the IRS plans to keep personal and business 1099-K forms separate, the best advice I have is to ensure that you use business and personal accounts for these types of apps.
So, do not comingle your funds using these popular apps and instead open specific business accounts for each app through which you plan to receive payments.
Hopefully, this entire situation will become clearer later this year. Or what would be even better, the lobbying in Congress is successful to change the law to avoid this quagmire altogether.
The reality is that too many people receive legitimate funds from family, friends, or even their employer that are reimbursements or low-value gifts and typically not applicable to income tax. Using the same form to report money flow for two distinct purposes doesn’t make sense to me.
Transitioning From PayPal to Online Marketplace TPSO
This section is only applicable to sellers that in 2021 transitioned from PayPal or another payment solution to one operated by the marketplace (Marketplace TPSO). Last year, many eBay sellers were moved from PayPal to eBay Managed Payments and this applies to them.
But, unfortunately, it is another situation that creates several confusing scenarios. So, here it goes.
You may not have received a 1099-K from any platform, PayPal or the Marketplace TPSO (ie eBay) if you did not meet the federal or state threshold on either platform. But as I already said, that doesn’t mean you don’t owe taxes on profits from those sales.
For example, and using the IRS requirement of $20,000 and 200 transactions, let’s assume you received $15,000 through PayPal and $15,000 through eBay, you would not receive a 1099-K from either service. But you are still legally required to pay the income tax on profits as I discussed earlier.
However, if you received $15,000 through PayPal and $22,000 through eBay, you would only receive a 1099-K from eBay. In that case, you are also still legally required to include the sales from the entity that did not provide you a 1099-K form to include in our tax return.
Again, both examples apply only to the 2021 federal IRS threshold. Obviously, if you live in one of the states mentioned earlier where the threshold is lower, then you will receive a 1099-K from all entities required to issue them.
And as I discussed already, you only pay taxes on net profits, so you should have business expenses that reduce your tax burden, regardless of whether you receive a 1099-K or not.
Gross Sales Versus Reported Gross Sales on 1099-K Forms
More confusion. In many cases, gross sales you track or which are reported through sales reports on marketplaces will not match the reported transactions on 1099-K forms.
The TPSO reported sales on 1099-K forms include shipping, sales tax, and any other additional applicable fees that were charged to the buyer. They do not include adjustments for credits, cash equivalents (cashback), discount amounts, fees, or refunded amounts.
Since marketplaces are now required to collect applicable sales tax on domestic sales unless sellers specify state or states for which they will collect the tax themselves, the sales tax the marketplaces collect and remit to the state tax agencies are not included on the 1099-K form.
However, for example, when you collect and remit sales tax for your home state, a typical scenario especially if you have sales outside of the marketplace(s) you use, that amount is included on 1099-K forms.
Another wrinkle is that the IRS is specific in its wording that only “settled” transactions are to be included on a 1099-K form. Not all TPSOs settle or can settle all transactions immediately for a variety of reasons, which means you will need to make adjustments on how you account for your gross sales to remedy this discrepancy.
To provide some context here, if you have a credit card with a statement closing date of January 31 and you make a $50 purchase on that date, the amount is typically in a pending status for 1 to 2 business days.
When the credit card issues the monthly statement for January, the $50 will not be included. That charge was not settled in January and will end up on the February credit card statement.
While this credit card example is the reverse side of what I am discussing with settled payments transactions on 1099-K forms, I think it illustrates best a common concept many people may have seen before.
But I will give another way to look at this. 1099-K forms are issued on a Cash Basis. In accounting, there are two primary ways to manage business finances, Cash Basis Accounting and Accrual Basis Accounting.
Most small businesses operate their entire business on Cash Basis Accounting, which means recording income when you receive the payment and recording expenses when you actually pay for them.
In Accrual Basis Accounting, you use the dates of income earned (ie invoice date) and the date of when a bill was received (or dated). The actual date of monies received or monies used to pay a bill are not considered in Accrual Basis Accounting.
There can be a hybrid (cash/accrual) situation that may work better for some businesses. But this would require help from an accountant to ensure your business is setup up correctly to use such a hybrid system.
Other reasons why the 1099-K form may not match your sales is that the TPSO made a mistake or someone stole your identity and opened an account on the marketplace. There are a few other reasons that may involve giving cashback or sharing credit card terminals with others, but that should not be the case with online marketplaces.
If you believe the TPSO issued an incorrect 1099-K, you should contact them immediately to resolve the matter. They do have an obligation to work out the situation with you and report accurate data to the IRS and other state revenue agencies.
Should you run into headwinds solving an incorrect 1099-K with the TPSO, you may need to discuss options with an accountant or attorney to ensure you are filing your taxes correctly.
And to reiterate a previous point that could impact the reported gross sales on a 1099-K form, if you have multiple accounts on a marketplace, the marketplace may have issued one 1099-K combining the sales from all your accounts on the platform.
This definitely would fall in the category of getting professional help with your taxes.
How Do I Reduce My Tax Burden?
Since the 1099-K form reported sales are gross sales you will need to reduce your tax burden by including allowable deductions on IRS Schedule C (1040). The Schedule C form shows typical standard deductions applicable to most businesses.
But there are others that may be significant which may be less obvious to newer business owners, but fall under one of the main deductions shown on the Schedule C form.
For example, you may be able to deduct miles driven to and from the post office when mailing your orders, miles driven going to vendors or visiting garage sales to buy products to sell, or even deduct the use of dedicated office space in your home to run your business.
This is where you want to discuss your business with an accountant that can help you identify applicable deductions and explain what backup you must have to justify those deductions.
To illustrate how just keeping track of business mileage can help you reduce your tax burden.
The 2021 rate of 56 cents per mile (58.5 cents in 2022) could reduce your taxable income significantly if you make frequent trips with your personal car for business purposes. Just driving 1000 miles per year for your business could result in a $560 deduction on our 2021 tax return.
Even online tax software like TurboTax or Tax Act ask questions about lesser-known or understood legitimate business expenses and can help you find deductions to reduce your tax burden.
But if you are new to running a business, it may be wiser to start with professional help. Some deductions require significant record keeping which you would need to produce in the event of an audit.
Also, don’t get too hung up on monthly numbers a TPSO may provide on a 1099-K form, as Schedule C only deals with the yearly totals for sales and deductions.
The monthly figures may help you identify major discrepancies such as a refund you forgot or a personal sale you made on another account that appeared on your 1099-K.
For tax filing purposes, the IRS only cares about yearly totals.
Reports of eBay 1099-K Problems in 2021
There are reports on eBay community forums about apparent issues with 1099-K forms that were incorrectly issued (below the required state or federal thresholds) which are causing some sellers angst.
Unfortunately, the reality is that the federal and state laws only require TPSOs to issue 1099-K forms when thresholds are met, but they do not preclude them from issuing those forms when the thresholds are not met.
This happens frequently with 1099-MISC forms as some companies just issue those forms regardless of the amount reported.
The fact that some sellers may have engaged in tax evasion by not reporting applicable income on business sales on eBay is not an eBay problem, it’s a taxpayer problem.
While reports indicate that eBay is trying to fix this problem as they apparently had not sent the information to the IRS or state revenue departments, can sellers really be sure that another glitch doesn’t happen and the records are sent anyway?
Regardless, as I already mentioned numerous times, it doesn’t matter if you receive a 1099-K form or not. If you sold online for profit, you owe tax on the profit, period. While these issues with eBay may be unfortunate, they just show that trying to evade paying taxes can come back to haunt you if mistakes by others happen.
Of course, if the 1099-K issued is incorrect, which there are reports that some people have received 1099-K forms from eBay that do not sell on eBay or the amounts reported are significantly higher than their sales show (even after considering what is included in a 1099-K form as discussed earlier), then sellers or people do need to contact eBay and get this resolved.
If you never sold on eBay and received a 1099-K form, you may want to check out this link for more information from Value Added Resource, which is collecting information on those reports for further investigation.
New Lower Threshold for 1099-K in 2022
And finally, I another word about what is changing in 2022 and what you need to consider for next year.
In Section 9674 of the American Rescue Plan Act, Congress lowered the threshold for issuing 1099-K forms from $20,000 and 200 transactions to just $600 with no minimum on the number of transactions.
This means unless you only sell a few items on eBay that do not exceed the $600 with all the fees and shipping, you will get a 1099-K from eBay, absent a last minute reprieve by Congress.
eBay is asking for help from sellers to lobby Congress to change this requirement, but don’t hold your breath.
We already know that some states changed reporting requirements for the 1099-K form and it’s possible more may join the list, regardless of what happens in Congress.
That is why it’s so important that sellers separate personal and business transactions on eBay and other marketplaces as quickly as possible.
Sellers should discuss with their accountant what they may need to do to track and separate personal sales and payments received from PayPal, Venmo and other cash apps as they will also be required to issue a 1099-K on $600 or more. I already mentioned this situation is still somewhat unclear on how the IRS will be able to tell the difference.
Fundamentally, the better your business accounting, which means keeping business and personal finances worlds apart, the better prepared you will be next year.
But some seasonal sellers that didn’t receive a 1099-K before this change may have to worry the most as they could become exposed for tax fraud in previous years. It would be wise to discuss this situation with a tax professional on how to address your previously not reported income.
There are other issues that are important considerations as well. For example, the IRS requires self-employed taxpayers to make quarterly tax payments.
Even if you choose to ignore your previous tax obligations (not recommended), you may still have to start making quarterly payments for this year’s income to avoid penalties when you file your 2022 taxes next year.
As it looks now, accountants will be very busy next year during tax season trying to sort out these issues.
You can probably wait until after April 18 this year as we are in the busy season now for accountants. But when tax season ends, you should discuss your situation with an accountant to get ahead of the game.
I hope this guide provided some fundamental understanding of what the 1099-K forms are all about, possible ways you can do to reduce your tax burden, and what you should expect for next year when it’s possible this could become even more confusing.
This post will be updated if any new and relevant information becomes available. This is the first version posted (2/19/2022)
The US Small Business Administration is a partner of SCORE with corporate sponsors also supporting the organization. It’s really a free service and can be a fantastic resource for new business owners.
Finally, here is a list of links you can use to learn more about 1099-K forms and your obligations being a business owner. This is where I sourced much of the information for this article.
- IRS: Self-Employed Individuals Tax Center
- IRS: Apply for an Employer Identification Number (EIN) Online
- IRS: Understanding Your Form 1099-K
- SCORE: Accrual Basis vs. Cash Basis Accounting
- Maryville University: When to Use “Hybrid” Accounting Solutions
- H&R Block: 1099-K form: Everything you need to know
- Turbo Tax: Form 1099-K Decoded for the Self-Employed
- Tax Act: Form 1099-K – Merchant Card and Third-Party Network Payments
- Amazon: IRS Form 1099-K – Form Generation and Payee Information FAQ
- eBay: eBay and Form 1099-K
- Etsy: Will I Receive a 1099-K Tax Form From Etsy?
- Poshmark: How to access my 1099-K
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