A few days ago, the IRS sent out an email reminding taxpayers that more Americans will receive Form 1099-K in January for selling online or providing services, raising awareness that some people may owe taxes on untaxed income.
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What changed? As part of a legislative change in the American Rescue Plan Act of 2021, the IRS now requires Payment Card and Third-Party Network Transaction providers to issue a Form 1099-K for payment card transactions and third-party payment network transactions of more than $600 for the year.
Prior to tax year 2022, the federal threshold before most taxpayers received a Form 1099-K was 200 transactions and $20,000. Some states had lower thresholds, resulting in some taxpayers receiving this form even if they didn’t meet the IRS minimums.
Who does this affect? While most businesses have been receiving Form 1099-K from their credit and debit card processor or eCommerce platform with an integrated payments solution (ie Shopify), this new law expands the requirement drastically.
Any individual or micro business selling on online marketplaces like eBay, Etsy, Amazon, Poshmark, and others that process payments on their eCommerce platforms will be receiving the form if they meet the new minimum threshold.
In addition, taxpayers that receive money through financial services companies like PayPal, Venmo, and Cash App may also receive a Form 1099-K. (Zelle is excluded, we’ll explain later)
Woah, this is all taxable income now? This is where it gets complicated and confusing. The IRS says:
“There is no change to the taxability of income; the only change is to the reporting rules for Form 1099-K.
“As before, income, including from part-time work, side jobs or the sale of goods, is still taxable.
“Taxpayers must report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return.”
Huh? Personal items and gifts too? “The IRS emphasizes that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.
“If a Form 1099-K is incorrect and reflects income they didn’t earn, they should call the issuer. The IRS cannot correct it,” the IRS concluded.
The Confusion: The last quote from the IRS effectively suggests that individuals selling personal items at a loss on platforms such as eBay should contact eBay if they receive an erroneous Form 1099-K as those sales are not taxable (normally we should add).
But that is not what is going to happen. Online marketplaces do not know if a seller is selling for profit or just cleaning out their closet. So, the IRS requires them to issue Form 1099-K regardless.
Financial services companies like PayPal, Venmo and Cash App which offer Person-to-Person (P2P) payments, will try to differentiate between personal and business payments.
PayPal and Venmo explain:
“Both PayPal and Venmo offer a way for customers to tag their peer-to-peer (P2P) transactions as either personal/friends and family or goods and services by choosing the appropriate category for each transaction.
“Users should select Goods and Services whenever they are sending money to another user to purchase an item, like a couch from a local ad listing or concert tickets, or paying for a service.”
Cash App explains:
“Form 1099-K is used to report transactions for the sale of goods and/or services made to Cash for Business accounts.
“If you have a personal Cash App account, you will not receive a Form 1099-K from Cash App, and Cash App will not report any of your personal transactions to the IRS.”
The differentiator appears to be based on whether an account/transaction is designated as business or personal. Business accounts or transactions are charged a transaction fee for each payment, while personal payments are free.
What about Zelle? The service will not be sending out Form 1099-K for any transaction, business or personal, because the new law does not require Zelle to inform the IRS.
Here is their explanation:
“Zelle does not report any transactions made on the Zelle Network to the IRS, even if the total is more than $600.
“The law requiring certain payment networks to provide forms 1099K for information reporting does not apply to the Zelle Network.
“If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS.”
Apparently, Zelle is exempt from the reporting requirement as the service does not hold funds but facilitates the instant direct transfer of money between accounts by participating banks.
My head is spinning: I am still confused! How do I tell the IRS that items I sold on eBay were from my closet, and I sold them below the prices I paid years ago?
Frankly, that is a good question. The IRS says that if you make money selling an item (even if it’s old), you owe tax on the gain.
“Losses on the sale of personal items are not deductible and may not be combined with the sale of personal items at a gain to offset the gain. See Publication 525, Taxable and Nontaxable Income, for further guidance.”
It simply is not enough to just say that everything you sold is personal, therefore, not taxable income. It really depends on if you made money from the sale, as the IRS requires individuals to pay income tax on profit.
While the IRS keeps bringing up the issue of needing to pay taxes on profit, the agency never explains or provides actionable guidance about what tax filers are supposed to do with the Form 1099-K if all sales were at a loss, or there is a mix of sales that include gains and losses (which the IRS says are not deductible).
Professional help: It’s very possible that more taxpayers will need to turn to professionals, accountants or tax preparers, to help them comply with this new regulation.
And this is what has made sellers on online marketplaces especially angry with the marketplaces agreeing that this is going to generate a wave of burdensome tax documents on sales that are not taxable.
Earlier this year, eBay spearheaded a coalition of like-minded online marketplaces to lobby Congress to adjust the requirement.
And a few weeks ago, eBay also urged sellers, in a last-ditch effort before the new rule goes into effect, to contact their Members of Congress to fix the new IRS reporting requirement.
Short of a last-minute reprieve, confusion and frustration will reign next year.
IRS Resources, Record Keeping and Form 1099-K
To prepare for tax season, the IRS also issued another Tax Tip outlining record-keeping requirements and best practices to avoid tax-time frustration.
Additionally, the IRS maintains a FAQ about Form 1099-K for individuals going over a few scenarios, but again, it’s still a bit vague on some details.
- IRS: Good recordkeeping year-round helps taxpayers avoid tax time frustration
- IRS: Form 1099-K Frequently Asked Questions: Individuals
One final note: We’ve seen many very small sellers (or as we sometimes call them, micro-sellers) complain they now will have to pay taxes on a side hustle.
Some have even stopped selling for the year, once they approached $600 in sales to avoid having to report and pay income tax on profits.
Anyone that runs a small business, even one that only makes a few thousand dollars per year — and that has flown under the radar until now — was and still is required to report the income on their tax returns.
Taxation on income from part-time activities has not changed with this rule change.
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