Demystifying the New 1099-K Reporting Thresholds
If you sell items online, you’ve probably heard about new IRS reporting thresholds that went into effect this year. These new requirements have caused some confusion for sellers on online marketplaces. Not to worry — we’re here to help you understand these tax changes and what they will mean for the tax returns you’ll file for 2022.
Recap of the IRS reporting changes
Prior to 2022, online payment platforms like PayPal, eBay, and Etsy were not required to report transactions to the IRS until you hit an annual threshold of 200 transactions and $20,000 in payments.
Beginning Jan. 1, 2022, this changed significantly. Now, third-party payment platforms must now report payments totaling $600 or more in a calendar year, with no transaction minimum.
How you can prepare for income tax filing next year
Here are three key steps to help you accurately file your income tax return next year:
Practice good bookkeeping
It doesn’t matter if you are a casual online seller or operating as a small business — keeping detailed records is essential for tax purposes.
The best thing you can do is save your receipts and keep organized documents of all your transactions. Some of the most important records to keep track of include your cost of goods sold (usually what you originally paid for the item you are selling), shipping costs, any fees you paid when selling, and expenses for packing and shipping supplies. Be sure to keep track of any refunds paid to customers as well.
Tracking this information will help you determine your taxable income and prevent you from overreporting income that can result in an overpayment of income tax. Expenses like shipping and supply costs are generally deductible business expenses, so keep track of each item’s cost basis and the final sale price to determine the cost of goods sold. It’s also a good idea to take photos of the items sold and place them with your records.
Organized, detailed records will help streamline your income tax return whether you file on paper or use an online tax filing software like TaxAct.
Tax Tip: How long should you hold onto receipts? The IRS can typically audit tax returns filed within the last three years, so long as there is not a substantial error. Because of this, it is recommended that you keep receipts and other supporting documents for at least three years after filing your return, or until the statute of limitations expires. This can vary depending on when you filed (or didn’t file) — if you’re unsure, it’s probably best to hold onto the receipts and consult a tax professional.
Know how to use your Form 1099-K
The Form(s) 1099-K you’ll receive from third-party payment apps is an informational document designed to help you file your income tax return.
When filing, it is best practice to compare Form 1099-K against your personal records to ensure all your transactions are accounted for. The amounts reported on your Form 1099-K are gross proceeds, not necessarily income. To determine the income associated with each transaction, you will need to determine the cost basis of the item(s) sold.
It’s also important to note that transactions included on your Form 1099-K are based on the transaction settlement date, not the sale date. For example, if you sold an item on Dec. 31, 2022, but the funds did not settle through the payment app until Jan. 2, 2023, that transaction would show up on your Form 1099-K for 2023 instead.
How you report your online sales income depends on what you sell and whether you run a business. If you are a self-employed sole proprietor, you will report your business profits using Schedule C. If you are a consumer selling capital assets, you will report any profits as either short-term capital gains or long-term capital gains, depending on how long you had the item you sold. If you are a hobby seller not intending to make a profit, you’ll report that income as “Other Income” on your tax return.
If this is starting to sound like a lot, don’t panic. Reporting income like this as a first-timer is not nearly as daunting as it sounds. If you choose to file with TaxAct, our intuitive tax prep software will ask questions about items you sold and pull all the necessary tax forms for you to file.
Bottom line
There’s no need for online sellers to stress about their taxes next year. Think of Form 1099-K as a guide designed to help you determine your taxable income. Keep good records and understand that only your profits are taxable.
By following these essential steps, you’ll be setting yourself up to file with confidence next tax season.
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IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.
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