- Update: The new IRS notice creates a transition period of one year, postponing the $600 Form 1099-K threshold until the January 31, 2024 reporting date. In essence, the IRS is taking the rules back to the pre-March 2021 threshold ($20,000 and 200 transactions) for any calendar year beginning before January 1, 2023. The lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the American Rescue Plan Act.
- Beginning Jan. 1, 2022, if you receive $600 or more payments for goods and services through a third-party online marketplace, such as Etsy, Facebook Marketplace, Ebay, Amazon, OfferUp or similar platforms, these payments will now be reported to the IRS.
- Online Marketplaces will be required to send sellers a Form 1099-K for payments made in settlement of reportable payment transactions for each calendar year.
- The Infrastructure Investment and Jobs Act significantly lowered the Form 1099-K reporting threshold to goods or services of $600 for a single transaction within a calendar year.
- A breakdown of how the new tax reporting requirements will operate among third party payment organizations (TPSOs) are included below.
- This change has the potential to cause uncertainty for millions of small sellers resulting in overreporting and overpayment of taxes as well as confusing tax preparation scenarios.
New Online Marketplace Tax Reporting Threshold
With the most previous law , the IRS required PSEs and third party networks to issue Form 1099-K to report the following transactions:
- Gross payments that exceed $20,000, AND;
- More than 200 transactions within the current year
The new law requires users to receive Form 1099-K for payments of goods and services over $600 without the minimum transaction requirement, resulting in significantly more people receiving the forms and more total tax collected by the IRS in total.
About Form 1099-K for Online Marketplace Tax Reporting
Eligible sellers will receive a Form 1099-K from TPSOs for income received from the sale of goods or services by Jan. 31 of the following year.
In the following months, your TPSOs may request you to provide your Employer Identification Number (EIN), Individual Tax Identification Number (ITIN) or Social Security Number (SSN) if this data is not yet on file.
Your Form 1099-K will report the total gross income in Box 1a received during the year without considering any adjustments, discounts, or refunds.
Of note: If you receive money from selling an item at a loss, you are not required to report the amount on your tax return. For example, if you purchased a desk for $1000 and sold it at a loss for $300, that amount is not taxable. Best practices are to maintain receipts of the original purchase in the event of an audit.
Leading online marketplaces have recently formed a coalition aimed at promoting a fair online sales market for casual sellers, microbusinesses and entrepreneurs selling used and pre-owned goods through online platforms. The purpose of the coalition is to promote the interests of millions of individual Americans and entrepreneurs selling goods online and advocate for common-sense tax reporting regulations.
The 1099K Fairness Coalition’s top priority is addressing the new federal tax reporting requirement that Congress passed last year that will “disproportionately burden individuals selling used goods via online platforms. An unfairly low $600 threshold will confuse and burden millions of Americans casually selling used and pre-owned goods that are not generating taxable income, as well as those entrepreneurs and microbusinesses just getting their business off the ground. In a letter to lawmakers, the CEOs of leading e-commerce companies advocating for casual online sellers and microbusinesses urge the passage of legislation increasing the reporting threshold.
If left unchanged, the threshold reduction will:
- Hurt American families across the nation, many of whom earn extra dollars through selling used or pre-owned goods. Pandemic hardships have significantly increased the number of Americans selling used goods online;
- Cause confusion and uncertainty for millions of small sellers resulting in potential overreporting and overpayment of taxes, and costly tax preparation services;
- Deter the reuse and recycling of used goods, especially clothing and electronics; and
- Compound the resourcing challenges and backlogs the IRS is already facing even without millions of new 1099-K forms to process”.
Do Marketplace Users Have to Pay a New Tax?
Although this new law requires new tax reporting requirements, it does not impact changes to the existing tax law for any taxable or reporting requirements.
Form 1099-K is an informational tax form and may include amounts considered excluded from gross income for tax purposes. If you receive money that is a nontaxable source, there is no need to report that income on your tax return.
Best Practices for Marketplace Sales Reporting
Many payees that never previously received Form 1099-Ks should prepare for the receipt of these new forms. Unlike Form 1099-MISC, “Miscellaneous Information,” and Form 1099-NEC, “Nonemployee Compensation,” which report income, Form 1099-K reports gross payments without reductions for credits, discounts, fees, or refunds. As a result, the amount reported to the payee on a Form 1099-K likely will be higher than the payee’s gross receipts. Maintaining good books and records, even for the casual or occasional provider of goods or services, will be important for responding to an IRS or state tax authority inquiry about differences between what is reported on Form 1099-K and what is reported on the payee’s return.
Though the new law does not create a new tax, it does increase the need to keep accurate records of any taxable income received.
Your system should include income and expenses, including:
- Accounting and payroll records
- Bank statements
- Tax forms and returns
- Other business financial records
- Business owners should set up separate third-party payment accounts for business transactions
Millan & Co. offers “Full-charge” Bookkeeping services and are here to assist you with the new Marketplace reporting requirements
Our comprehensive approach allows our unique clients to confidently navigate the complexities of taxation as new laws are implemented into the tax code.
We focus on client satisfaction, delivering high-quality services at fair rates.
Contact us to learn more about our Bookkeeping services.