Do You Need To Report Your Online Sales to 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.

Tax law requires any website that processes more than $600 in payments to a customer to report them to the IRS. 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.

Online Sales Tax Reporting Requirements

Certain businesses must submit a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS. This requirement applies if they make more than $600 in payments to a business or individual during a tax year. The person or business receiving the money receives another copy of the Form 1099-K 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

What if I Get a Form 1099-K but Don’t Own a Business?

You may still be required to report income you received for online sales as an individual. This IRS form applies to income from certain types of sales.

Tax for online sales has been around for years. Yet, the 1099-K reporting threshold used to be much higher. Back then, it was usually the case that only online businesses earned enough income to receive this tax form. The American Rescue Plan Act of 2021 lowered the threshold to $600. This new reporting requirement means online sellers are now more likely to receive a Form 1099-K even if they don’t operate a business.

Reporting Form 1099-K Information

If you receive a Form 1099-K, you will use it while filing your tax return documents. Where you report the information included on a Form 1099-K depends on why you received the payment.

Payments for Personal Items and Resale

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.

Payments for Business Income

Those who are self-employed, contractors, gig workers, or sole proprietors will report the Form 1099-K payments as business income. For example, a self-employed rideshare driver reports app payments as business earnings.

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.

Payments for Side Hustles and Artisan Sales

Sometimes, people sell goods and services like artwork commissions to make extra money. They may receive a Form 1099-K if they use payment apps or other online methods for the transactions. As a form of self-employment, side hustles are generally reported in the same manner as business income.

But the difference between taxable income and nontaxable hobby or gift payments can be confusing. If you have income complications, you can speak with a tax attorney for help.

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.