When the IRS delayed the implementation of the $600 federal threshold for Third-Party Settlement Organizations (TPSOs), sometimes also referred to as Payment Settlement Entities (PSEs), to issue tax form 1099-K on goods or services, there was a big sigh of relief from users of online platforms such as eBay, Etsy, PayPal and Venmo.
But some sellers and those who have a side hustle offering products or services may be surprised to learn that they will receive a 1099-K anyway.
It seems there is some confusion about what the postponement means and to who it applies. It’s not as straightforward as some think.
Background: Since the term TPSO is probably foreign to most, let me explain why it affects online marketplaces and payments apps. In simple terms, a TPSO is a financial entity that processes credit or debit card payments. Any payments service such as PayPal, Venmo, or Cash App; and any online marketplace such as eBay, Etsy, Poshmark, OfferUP, or Amazon, as well as others that operate their own payments service, are considered TPSOs.
Some marketplaces may rely solely on an independent payments platform like PayPal to handle the payments on sold items, in which case, PayPal (or whatever other independent payments processor they may use) would issue the IRS 1099-K form.
While this post focuses slightly on eBay sellers, much of what I discuss here applies to income from sales on most other popular online marketplaces and payment platforms as well.
IRS Only Deferred 1099-K $600 Rule for One Year
Earlier in 2022, members of Congress in both parties realized this was a problem for many taxpayers as it would ensnarl transactions for income that normally would not be taxable, such as splitting dinner checks or selling used items out of a closet on eBay.
But after nearly one year, multiple bills to change the federal threshold (which stalled), and even some last-minute jockeying to try to get language into the 2023 Omnibus Spending bill in December to fix this problem, Congress failed to act.
Without intervention by the IRS, the new $600 federal requirement would have applied to millions of taxpayers who would’ve ended up with a 1099-K form in January.
Fortunately, the IRS did issue a reprieve after what appears to be pressure from both Democrat and Republican members of Congress.
But this delay of the new rule is for one year only, meaning that as it stands today, taxpayers in 2024 will receive 1099-Ks if their transactions in 2023 exceed $600.
Of course, there is always hope that Congress will fix the issue in 2023 by passing a new law adjusting the federal reporting minimum, but let’s see if that will happen.
What does this mean for the tax year 2022? Sellers with more than 200 transactions and $20,000 in sales in 2022 will still receive a 1099-K.
The IRS delay did not change the old federal threshold, it purely maintained the status quo. I’ve seen some comments on online forums by people who believe they will not receive a 1099-K at all, that is simply incorrect.
As a matter of fact, some sellers will get a 1099-K, even if their sales were below the federal $20,000 and 200 transaction threshold in 2022.
Let’s dig into how this is possible.
Why Sellers May Receive a 1099-K Even If They Sold Less Than $20,000 in 2022
The IRS’s 200 transactions and $20,000 in annual sales is a federal reporting threshold. While most states follow the federal requirement, some states passed laws previously lowering this threshold.
As of this writing, if you are a resident in one of the following states and pay income taxes in that state, a different state threshold applies and TPSOs are required to send a 1099-K form in January if you meet these lower minimums.
- Arkansas ($2,500)
- District of Columbia ($600)
- Illinois ($1,000 and minimum of 4 transactions)
- Massachusetts ($600)
- Maryland ($600)
- Mississippi ($600)
- Missouri ($1,200)
- New Jersey ($1,000)
- Vermont ($600)
- Virginia ($600)
Among these states, only Illinois has a minimum transaction requirement. All other noted thresholds apply regardless of how many transactions you had.
Moving To Another State
Did you move in 2022 from one state to another? If this involves one of the above states with lower minimums, you may receive a 1099-K as well.
It is important to note that depending on state tax laws, you may have to file a state income tax return in a state you previously lived during the tax year 2022.
And this could trigger receiving a 1099-K form if any time during the tax year, not just at the end, you lived in one of the states with a lower 1099-K reporting requirement.
Multiple Selling Accounts
Another interesting problem is that some sellers operate multiple accounts on the same platform. For example, they may have one eBay account for personal items and one for business sales.
PayPal and Venmo have said they would distinguish between personal and business transactions, most likely based on the type of account and transaction (fee or no fee). But marketplaces do not have that ability, and there has been no guidance by the IRS on how they could do that.
This is one of the major issues with the $600 threshold because it comingles both types of transactions and forces online marketplaces like eBay to treat all transactions as business transactions, leaving it to the seller to sort out how to report this income to the IRS.
Some sellers thought they could simply have one personal selling account and a separate business account to avoid personal items from being included in the 1099-K.
But that doesn’t work if the Taxpayer Identification Number (TIN) is the same, which is the case for most micro and small businesses that operate as sole proprietorships and use their social security number as the TIN.
Therefore, assuming you sold $4,000 of personal items through your personal account and $18,000 through your business account — and both accounts have the same TIN — this will result in you receiving a tax form 1099-K if your combined online sales met the 200 transactions and $20,000 federal minimum.
Of course, the same applies if you live in one of the states with a lower 1099-K reporting threshold, just for that lower reporting requirement.
Shipping, Taxes, Other Fees, Refunds
Another big misconception about what is included on a 1099-K form is that sellers often believe the amount is for net sales.
But the IRS requires TPSOs to report gross amounts, which include all additional charges such as sales tax, shipping, and other fees the buyer may pay, but the gross transaction amount does not include credits, refunds or other adjustments.
The latter is often contentious in online forums, but the IRS is clear about that policy, “The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.”
I believe some sellers have been caught out on this misunderstanding because they may have stopped selling short of the reporting threshold but didn’t factor in the extra charges transacted by the marketplace or TPSO while also incorrectly including refunds or adjustments in their calculations.
In addition to the more common examples above, some states require TPSOs to issue 1099-Ks — regardless of any threshold — if state taxes were withheld during the year by the TPSO. This is a special situation, but one that may affect some online sellers.
Profits Are Always Taxable
While some sellers are happy that the IRS postponed the new 1099-K reporting requirement for one year, it’s also important to note that all profits from online sales are taxable income, regardless of whether you receive a tax form or not.
Obviously, profits do not mean revenue. Professional online sellers can deduct business expenses, which include the cost of goods sold, selling fees, shipping costs, business mileage, other operational costs, etc.
The same is valid for people who receive payments from side hustles, such as mowing yards or offering home improvement or repair services on the side.
Also, such part-time endeavors are usually subject to self-employment taxes which may require making quarterly tax payments to avoid fines from your state tax agency and the IRS.
It really doesn’t matter if eBay, Etsy, PayPal or any other TPSO, issues a 1099-K. If you run a business, even if you are selling as a hobby, you are a business owner and should be reporting taxable income and paying taxes.
Failing to report business income from casual online sales is considered tax fraud.
Fundamentally, in the context of online selling, the reduced threshold controversy is about personal sales of items you purchased a long time ago, but no longer need and now want to sell online because it’s more convenient than holding a garage sale.
Generally, such personal online sales are typically considered non-taxable income as you are selling the item(s) below your original purchase price.
However, if you sell a collectible (such as a trading card you bought 10 years ago) on eBay or another marketplace, the net profit is taxable. Again, your taxable income from such a collectible sale may be reduced by legitimate deductions.
The current trend in Congress seems to be to raise the federal 1099-K threshold to a minimum that would allow most people to use a platform like eBay to sell personal items online without worrying about how that may affect their tax return.
Let’s face it, most people don’t have receipts from years ago to document the original purchase price to prove they sold it at a loss.
Of course, with some states already having lowered their 1099-K reporting requirement, and others may be considering the same, the federal threshold is just one part of the equation.
If you live in one of these states, and with the tax season around the corner, your best solution is to seek a tax professional for advice.
While online tax software to file your 2022 income tax return may also be an option, it may not provide the best advice for this scenario, absent more detailed guidance by tax agencies on how to handle personal sales reported on a 1099-K.
And finally, don’t ignore the 1099-K if you receive one. Check it over for being correct and if you believe there is an error, immediately contact the issuing TPSO for a correction or clarification.
Disclaimer: The information provided here is not tax advice. It was researched from numerous reliable sources online discussing selling online. I highly recommend you seek professional tax advice if you made a profit on a platform like eBay or Etsy; became an “accidental” eBay business that transitioned from selling personal items to turning it into a side business; or received a 1099-K from eBay or Etsy (or any other TPSO).
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