Do You Need To Report Your Online Sales to the IRS?
You might not think the money you make from activities like reselling your concert tickets online, selling unused items through an online auction, or renting out your home for a few days on a short-term rental website is taxable income. However, the Internal Revenue Service (IRS) will generally disagree, and U.S. tax law is on the side of the IRS.
The tax code states that all U.S. citizens and permanent residents must pay taxes on all income, regardless of source. That means the IRS taxes the money you make from your online sales in the same manner as the income from your job.
It was hard for the IRS to learn about the income you were earning from small online sales prior to 2023. But tax law changes now require any website that processes more than $600 in payments to a customer to report them to the IRS. The reporting requirements take effect for the 2023 tax year. You still must pay tax on sales totaling less than $600 a year, but websites are not required to report those sales to the IRS.
New Reporting Requirements
Beginning Jan. 1, 2023, certain businesses must submit a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS whenever they make more than $600 in payments to a business or individual during a year. Another copy of the Form 1099-K is sent to the person or business receiving the money so they can include the payments on their tax returns. Three types of businesses issue most of these forms:
- Third-party settlement organizations like PayPal, Venmo, and Zelle
- Online marketplaces like eBay, Etsy, and Airbnb
- Credit card companies like Visa, Mastercard, and American Express
The new $600 Form 1099-K reporting rules were included in the American Rescue Plan Act of 2021. They were initially to go into effect for the 2022 calendar year. But, the IRS postponed the reporting requirement until the 2023 tax year to reduce taxpayer confusion and to give them more time to adjust.
Unfortunately, by the time the IRS postponed the rules, many businesses had already set up their systems to issue the forms automatically. As a result, some online sellers received them for 2022. Taxpayers who received Forms 1099-K for 2022 based on the $600 threshold were still required to include that income on their federal tax returns, even if they were not required to receive one.
Form 1099-K has been around for years, but the reporting threshold had been so high that few individuals who were not operating online businesses received them. Until 2023, businesses that allowed users to make online sales were only required to issue Forms 1099-K when an individual or business received over $20,000 and was involved in 200 or more transactions in a year.
Reporting Form 1099-K Information
Where you report the information included on a Form 1099-K depends on why you received the payment. For example, if you were paid for selling a personal item you owned for more than one year and earned a profit, that profit is a capital gain. Capital gains are reported on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses. But if you owned the item for less than a year, the profit is reported as ordinary income.
Those who are self-employed, contractors, gig workers, or sole proprietors will report the Form 1099-K payments as business income. Individuals will include this income on Schedule C, (Form 1040), Profit or Loss from Business (Sole Proprietorship). Remember, if your net earnings after business expenses are more than $400 for the tax year, you must file Form 1040, Schedule SE, Self-Employment Tax.
What About Nonsale Transactions?
Some people use services like PayPal and Venmo for personal transactions that are not sales. For example, you may spend $1,000 on concert tickets for you and your four friends and have them each Venmo you $200 for their tickets. Venmo will issue you a Form 1099-K stating that you received $800 in payments. To prevent this, you should categorize the transaction as nontaxable.
If you still receive a Form 1099-K reporting the transaction, the IRS recommends contacting the organization that issued the form immediately. The issuer will be listed as the "FILER" in the upper left-hand corner of the form. They should give you a corrected form.
Should an issuer not send you a corrected Form 1099-K, the IRS recommends that you zero out the payment on your federal individual income tax return. Do this by providing the following information on your Schedule 1 (Form 1040):
- Enter the amount reported in error on Part I, Line 8z (Other income) and "Form 1099-K received in error"
- Enter the same amount on Part II, Line 24z (Other adjustments) and "Form 1099-K received in error"
Failure To Report Form 1099-K Income
It is tempting to ignore a Form 1099-K you receive. But, the IRS is also receiving a copy of the form and will expect the information to be on your tax return. Failure to report that information could result in the IRS sending you a notice that proposes additional tax or even an audit of your tax return for the year. The IRS may also assess penalties and interest.
Still Have Questions? Contact a Tax Lawyer
If you or your small business received a Form 1099-K, you may be confused about what it means and how the information must be reported to the IRS. Fortunately, a local tax attorney can help with your tax preparation. A tax lawyer is a tax professional who understands the IRS's rules for reporting the income included on Forms 1099-K on your individual or business tax return. They can also provide additional information on reducing the tax you owe.
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