"You don't pay taxes – they take taxes." - Chris Rock
Up till now, whatever you made on eBay, Etsy, and the like might have seemed like tax-free cash. But now, the IRS will be in the know more and more regarding those sales… and that’s something you’ll want to keep in mind going forward.
Lowering the limit
Rules that were in effect until this month said that if you sold goods or services via platforms like eBay, Etsy, and Uber and if that platform used third-party transaction networks (think PayPal), you received a federal tax document called a 1099-K, and your income was reported to the IRS.
Thing is, you didn’t get that form unless you had at least 200 transactions worth a combined twenty grand or more.
Now, that limit’s been lowered.
Payment apps such as PayPal, Venmo, Zelle, CashApp, and other third-party e-payment networks will start using the 1099-K to report your business transactions to the IRS if you reach $600 or more annually. (That’s a lot less than 20k!) This expanded reporting is part of the American Rescue Plan recently signed into law.
Yikes. With inflation on the rise, an Etsy business could fetch that much hawking a few of its antique and handmade wares.
But don’t panic yet. Let’s go through this a step at a time...
A big deal?
First of all, this isn’t a real tax change. It’s a tax reporting change. You were always supposed to report all income you received from online sales. In many cases, it’s been taxable money – but most folks were below that five-figure threshold.
Basically, the tax law concerning these sales just became what experts are terming “more visible.” We agree: “Visible” and “IRS” aren’t words most people want to put together when talking about all their income.
But you may not be on the hook for as much as you think.
Not every deal you do on these payment apps is taxable. Your grandma can still send you a hundred bucks for your birthday and your friend can still zap over half the price of the dinner tab from last night. You’re also in the clear if you use a payment app to make charitable contributions or even to pay rent.
And here’s a big one: You’re not on the tax hook for the income if you sell something on, say, eBay for less than you paid for it.
Again, it’s about visibility. The IRS is looking for a better handle on business (not personal) income – and even then, you can still use legit deductions to improve your tax situation regarding biz income. Let’s also assume that if you’ve been using these platforms to get payment from a side business, you’ve been reporting the money anyway. Right?
So, the 1099-K is just going to start showing up for lower amounts.
Double the fun
This change doesn’t mean, though, that you’re completely in the clear – at least in terms of keeping your tax paperwork straight.
It’s possible that a year from now your payment app may be unsure if you’re using them for business income or personal expenses. They might send you (and the IRS) a 1099-K and leave it up to you to report the income or explain that the money somehow wasn’t taxable.
(By the way, remember we mentioned that you’re not going to pay taxes on income if you sell something for less than you paid for it? A good hedge is to lay hands on your original receipt. An old credit card or bank statement might help …)
And on the business side, if you’re a freelancer, when the 2022 tax forms start coming out, you might get both a 1099-K and a 1099-MISC or a 1099-NEC for the same transaction. Again, it’ll be up to you to explain to the IRS that the two forms represent the same transaction.
To head off this confusion, payment apps will likely ask you for more tax-related info in the coming months, including your Employer Identification Number, Individual Tax ID Number, or Social Security Number, if you haven’t already provided these. Word is most apps will also soon have a way for you to tag transactions as “personal” or “business.”
Coping with a new tax wrinkle is often a work in progress.
BE THE ROAR not the echo®
Warmly,
Janet Behm
Utah Real Estate Accountants
(801) 278-2700