Succeeding in Your Business: The new 1099 requirement for online sales
Cliff Ennico
A little-known (and little-publicized) provision in last year’s American Rescue Plan Act is wreaking havoc in the community of people who sell goods and services on eBay, Amazon, Etsy, Shopify and other online retail platforms. There’s been a lot of confusing talk in the media about this lately, so let’s start with the basics and get the facts straight.
Generally, if you sell stuff on one of these platforms for more money than what you pay for it (in other words, a profit), that profit is income to you. You are required to report that income on your tax return each year and pay taxes on it at whatever your effective tax rate is.
If you make more than $1,000 in profit selling stuff on eBay, Amazon, Etsy, Shopify or another retail platform, the IRS doesn’t want to wait until April 15 to get their money. You have to report your income and pay tax in four quarterly “estimated tax” installments on April 15, June 15, Sept. 15 and Jan. 15.
Because the IRS doesn’t trust you to do this right, for the last decade or so it has required online payment providers such as PayPal, Venmo, Cash App and Zelle (heavily used by online sellers) to send an income statement (called a Form 1099-K) to online sellers who conduct more than 200 transactions through their service each year totaling $20,000 in gross sales. A copy of this Form 1099-K is sent to the IRS and to your state tax authority (if your state has an income tax).
Now, here’s where things get a bit sticky. The Form 1099-K reports only the gross amount you were paid for the goods and services you sold online. PayPal, Venmo and Zelle have absolutely no idea how much you paid for those goods and services, and therefore what your profit was on each sale. It’s up to you to calculate the profit you generated from those sales and pay tax on only the profit portion, not the total amount on the Form 1099-K.
If you are treating your online selling as a business (and shame on you if you aren’t), you report your total income, costs and expenses on Schedule C on your personal tax return (Form 1040). Basically, what you are telling the IRS is, “Hey, I know the Form 1099-K says I made $100,000 selling stuff online, but my profit on those sales was only $40,000, so that’s the only income I have to pay taxes on.”
If the IRS does not believe you, they will audit your tax return and you will have to provide documentation supporting your calculation of taxable profit.
The good news is that when you calculate your tax liability this year (for online sales made during 2021), you will continue to do it the way you always have.
The bad news is that everything will change next year (for online sales made during 2022), thanks to the American Rescue Plan Act.
Starting Jan. 1, 2022, online payment solutions such as PayPal, Venmo, Cash App and Zelle will be required to send online sellers a Form 1099-K if they receive more than $600 in annual payments through the platform. The number of transactions you engage in no longer matters.
The lower threshold means that online sellers will have to pay tax on a lot of smaller transactions they may not have reported to the IRS in the past. Accordingly, it will create a lot of headaches and paperwork, especially for people who sell only occasionally or who treat their online selling as a hobby.
For example, you have a huge collection of classical music CDs and decide to sell them on eBay one at a time. You do not plan on making this a business or regular source of income; you merely want to clean out your basement or garage. The IRS doesn’t care. If you sell more than $600 of CDs this year and are paid via PayPal, PayPal will send you Form 1099-K next January. If you sell $1,200 of CDS — $600 using PayPal and $600 using Venmo — you will get Forms 1099-K from both PayPal and Venmo.
What can you do about this? Basically, not much. Unless Congress changes the law (which it might if the Republicans take control of Congress this fall, as some predict), there are only three things you can do:
No.1: If you are not treating your online selling as a business, start doing so. Talk to your accountant about filing Schedule C as part of your personal tax return next year.
No. 2: Keep track of all deductible expenses you can use to reduce your taxable income from online selling this year. (Buy CPA Bernard Kamoroff’s book 475 Tax Deductions for Businesses and Self-Employed Individuals: An A-to-Z Guide to Hundreds of Tax Write-Offs and commit it to memory.)
No. 3: If you expect to generate only a small amount of money from online selling this year (less than $2,000-$3,000 in gross sales), consider terminating your relationship with PayPal, Venmo and Zelle and requiring your customers to pay the old-fashioned way: by checks, credit cards and bank wire transfers.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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