Selling Online Will Cost More Taxes

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You may have that woodworking hobby and sell some pieces occasionally on Etsy, or you may sell old jewelry on eBay. It may not be a hobby but a service you provide that you receive payment through PayPal or Venmo.

The Internal Revenue Service (IRS) is going after the small sellers or service providers who are paid through third-party apps. The threshold for needing a Form 1099 is lowered for tax year 2023. What is it, and how will it affect most people?

Past Form 1099-K Third-Party Requirement

Etsy, eBay, and third-party apps like PayPal, Venmo, and CashApp were required to issue a Form 1099-K for a specific number of transactions and dollar amount.

The dollar threshold was any amount over $20,000 per year. And the number of transactions was 200 per year.

A Form 1099 is issued when an organization does not withhold income tax, Social Security, Medicare taxes, etc.

But this threshold is disappearing for the tax year 2023.

New Form 1099 Threshold

Called the 600 rule, the new threshold for receiving a 1099-K from a business dealing online is $600 per year with any amount of transactions.

This was initially supposed to take place in 2022, but confusion and pushback from third-party apps convinced the IRS to postpone it. The IRS had received several concerns regarding the implementation timeline and wanted to help smooth the transition.

It should be noted that with or without a Form 1099-K, the taxpayer is required to report all income to the IRS.

A transaction on Zelle doesn’t require a 1099-K. Zelle is like a cash payment. It’s a transfer between financial institutions. But you are still required to pay taxes on any income.

What Information Does Online 1099-K Contain

This form reports the gross payment transactions you received from a third-party app. It will also report gross amounts from online retail platforms like Etsy or eBay.

Both you and the IRS receive a copy of the form. In other words, the third-party app or retail platform is required to send your 1099-K to the IRS.

American Rescue Plan 2021 Changed Requirement

The 1099-K 600 rule is a result of the 2021 American Rescue Plan. Spearheaded by the Biden administration, the rule ensures that anyone selling an old bedroom set or paying a babysitter electronically can trigger IRS scrutiny.

The measure was intended to lower the tax gap between those who owed and those who ended up paying.

A Joint Committee on Taxation estimated the 600 rule would bring in $8.4 billion when it was originally slated for 2022 through 2031.

Providing Tax Information

You must provide the third-party app personal information, including your employer identification number (EIN) or Social Security number.

Once you’ve reached the $600 mark, it will trigger a 1099-K to be sent to you to prepare your income taxes.

If you don’t provide this information and have reached the $600 threshold, you'll experience tax holds and a 24 percent backup withholding on the payments you collect in the designated tax year.

This is sent to the IRS. Funds that have been sent to the IRS will not be returned to you, but you can report them on your tax return.

Are Friends and Family Payments Taxed?

Your personal payments shouldn’t trigger a 1099-K form. They are not subject to taxation. So if you pay for your friend’s concert tickets and they reimburse you, it’s not considered income.

Only business transactions are subject to the 1099-K form. But having your friends or family write “personal” in the note provided is essential. Tell them not to jokingly write, “services rendered”—that could trigger a tax problem.

Congress Asked to Pass Legislation

According to the Coalition for 1099-K, Congress should increase the threshold. The new 2023 threshold affects millions of people who sell casually online.

The Saving Gig Economy Taxpayers Act was introduced and had bipartisan sponsorship. This would have repealed the IRS 1099-K $600 rule and turn back the clock to the $20,000 threshold.

But similar proposals have circulated before and failed.

Casual Sellers Targeted by IRS

The 1099-K Fairness Coalition cites a national survey of sellers. It said that the 600 Rule would deter 70 percent of respondents from selling online. Eighty-five percent felt that the IRS shouldn’t target casual online sellers.

Members of the coalition include:

• Airbnb
• eBay
• Etsy
• PayPal
• Poshmark
• Reverb
• Rover
• Tradesy
• and others

It’s pointed out that many of the online transactions are used goods. These are sold for less than the original purchase price.

The 1099-K Fairness Coalition said that for 40 percent of sellers, this new rule is a hardship. Since they risk over-reporting income, or those who are already cash-strapped will be forced to hire an accountant to file taxes.

Confusion Over Online 1099-K

There may still be some confusion over the 600 rule. An accountant could help you navigate this tax issue.

But because income over $600 is reported to the IRS, there is a high chance the agency will notice if you report a lower income on your tax return.

If you are selling used merchandise, like that old couch, it might be wise to request cash or a Zelle transaction.

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