Online Selling IRS Tax Reporting Changes
Article Updated 12-29-2021
Updates Include 2022 1099K law changes for anyone who sells on an online marketplace or uses an online payment service like PayPal and others; American Rescue Plan of 2022, Marketplace Facilitator Act of 2021, and what these mean if you want to sell your sneakers.
(Please Note: The information provided is in no way intended to act as legal tax advice. You should confirm any information with your state agencies, the IRS website, or a tax consultant.)
If you are interested in how the W-9 form that marketplaces like Mercari and others are requesting from you now that you will be receiving the 1099K if you reach $601 in a year. I did a new mini-article and a video discussing the W9 HERE
In 2021, somehow democrat Joe Biden in all unlikeliness became president 46 of the United States of America, with a house democrat majority in the U.S. congress, collectively passing a single party non-partisan act called the "America Rescue Plan".
Few if any congress members in either party were provided the required time needed to review all of the law changes that were being passed in a last minute agenda. The American Rescue Plan created a few general one-time positive changes, but the majority were high-price tag non-essential changes that immediately began impacting the economy leading to nationwide inflation.
Unfortunately, hidden within a very small section of the American Rescue Plan was a law change that impacts all online sellers going forward, part of a proposed two part-plan to give the IRS more oversight authority and income tracking into the personal finances of all Americans.
The key part pushed by House speaker Nancy Pelosi and President Joe Biden that were not included in the ARP act, but separately, would have forced all banks and financial institutions to report all deposits and transfers of $600 made to a bank, to the IRS. This we firmly rejected, so an new proposal of $10,000 was made. [Archived article of CBS report] This separate but related policy was rejected by the minority Republican members of Congress and enough high ranking Democrat members to block it from occurring, at least in 2021.
[I am using the free BublUp organizing app and website for the CBS report in this 2021 article update. It's like a social media version of dropbox. I'll get 1 Gig of storage space if you signup too. It's free. I like free. Bublup Referral Link]
The second policy was not discovered as being included, and therefore passed, hidden within the American Rescue Plan and it impacts all online marketplaces like eBay, Poshmark, Mercari, Etsy, etc.
Previously, as stated in the original article below; you could sell online without having to be overly worried or concerned about harassment from the IRS. Only after you had at least 250 sales and reached $20,000 in sales did a marketplace report that income directly to the IRS and issue you a 1099K IRS document. Maybe the original $20,000 was a little high, I always thought it was, but regardless it meant that you could sell your old belongings, unneeded belongings, those enormously over priced college text books, and clean out the garage with little more headache than the hassle of taking photos, creating listing, packing them up when they sold, and get some money back on your already depreciating products.
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Beginning January 22, 2021 SEC. 9674. MODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY NETWORK TRANSACTIONS is revised to eliminate the [250 sales] and change the [$20,000] to a measly $600 limit before online marketplaces and payment processors like Stripe, Amazon and PayPal are required to report that money to the IRS for a 1099K.
This change is very significant, it automatically changes anyone selling a single pair of fancy Nike shoe's that they bought new for $1,200, that they latter sell online for $600, into a small business or sole proprietor. Why is this a problem?
When you become a small business or sole proprietor, whether intentionally or accidently, you inherit a whole chain of new liabilities. You can be sued as an individual with all of your income and assets at risk, your city and/or state can penalize you for each month you operated without going through the legal process of obtaining a City Business License or registering with the State. How you report you income to the IRS changes too, you have to keep documentation of everything you sell, you have to report your income to the IRS at the end of the year on a Schedule-C form aka Profit and Loss statement. You are required to withhold your own taxes on the money you earned for self employment taxes, Medicaid and Social Security just like an employer does if you have a traditional job. Self-employment tax can average from 10% to 30% of any money you earn selling online.
Then there is the 1099K form, a tax document really is best suited for those intentionally trying to make a profit. That is what is was intended for. A method to help the IRS and small business, know how much tax they are required to pay.
Here are ways this new tax law targeted at anyone who sells online or processing payments online may impact you.
- You 100% have to report 1099 income on your taxes, no matter what kind of 1099 you receive.
- Makes you responsible for Self employment taxes and Independent Contractor taxes.
- Depending on your state and city, you may need a sellers permit or license.
- You may be liable for Self Employment penalty fees if you make over a certain amount of money in a quarter, but fail to report that income quarterly. Some infrequent sellers or sellers within a lower income volume who didn't owe taxes or self-employment the previous year are sometimes allowed to pay at the end of the year. (Check the IRS website for more details)
- If your city requires you to have a city license, you may be penalized by your city for each month you didn't have their license, once they find out. (If you go this path, get your City License before the State)
- You may have to do a more complicated kind of tax reporting at the end of the year with a Schedule-C profit and loss.
- You have to keep good records for every sale, you can not just assume that eBay or Bonanza is going to provide you with those records at the end of the year. eBay for example, historically only kept records of a sale for 90 days, where as Mercari actually has a page where you can download all of your sales for each year, that you sell on Mercari.
- Your state may want you to have a resellers permit so they can keep track of what you sold in and outside of your state. This can be required on a monthly, quarterly, semi-annually, annually basis, etc. In California for example, depending on where you are selling, you actually have to submit your sales to the state tax board, and its more frustrating than doing your own IRS taxes.
- Other requirements may apply.
If you are used to doing your own taxes and say you are a stay at homemaker or student, you may not be able to use one of the easy tax form methods to report your taxes, because the 1099 is part of the business tax forms. If you use a software or online service like HR Block, Turbo Tax to do your taxes, that can cost you from $89 to several hundred dollars, but it may still be cheaper than hiring someone to do your taxes for you.
Fortunately, if you earn or make under $72,000 a year, you may be able to use the IRS Free Tax File service could help you save some of that $600 you made selling your shoes. Unfortunately, some of the major companies that previously participated in the free tax file partnership have dropped out as of 2021. Intuit Free TurboTax is one of those who dropped out. Turbo Tax had been giving free use of its small business service with minimal restrictions, it was the easiest to you of all of the Free Tax File Services that IRS partnered with. I tried several of the free tax file services, and it was often a frustrating process, because they often lacked answers to questions I had, or asked questions that no normal person would understand.
Also unfortunate, once you start receiving a 1099K you are considered an Independent Contractor, so you become subject to owing Social Security, Medical and Self Employment taxes to the IRS, which averages 15% to 35% of however much money you made.
OK. I hate being that grim reaper here, but there is more potential bad news, because some states have laws that may require you to obtain a sellers permit going forward, and some cities may require you to obtain a City License which can be costly. [My city within Los Angeles County, California cost $180 to $280 a year for example]. Because you are now documented via the 1099K as someone who has sold $600 online within city limits, you may need to obtain a City Business License. Not all cities are so anal as to require a permit for sitting in your living room on your lap top computer or cell phone selling things you no longer need, but in States like California [a democrat veto proof super majority state that supports the new 1099K law and American Rescue Plan] you may need one [so subtract that amount from the $600 'profit'. To make things more confusing in a state like California for instance, in 2018 the state passed a law that is now already in effect called the "Marketplace Facilitator Law", it changed the definition of what a "seller" is. [I discussed this in videos on YouTube, so please refer to them for more details, or even better check the CDTFA website - link below]
If you are located in California, I recommend you check the CDTFA website directly for the most up-to-date details about the Marketplace Facilitator laws and policies. My videos below may be helpful, but probably contain some outdated information, since I released them in 2020.
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Before showing you the actual law, I do want to tell you one positive thing about this, depending on your situation and how you handle it.
In 2021, the IRS and many states decided that you are an "Independent Contractor", if you sell online. In 2022 the new 1099 will include the rest of you. What that means is you can write off many of your expenses.
TRIGGER WARNING
I know some reading this may get triggered at the mentioning of President Donald Trump. But there is a valuable lesson here. Despite what you think of Donald Trump or have been told to believe about him. He is technically brilliant when it comes to money and business. During his presidential term as president 45, politicians and the media screamed about his taxes. Why was everyone so angry? Because Donald Trump did, what you are going to need to do going forward.
When you are a small business or independent contractor, you get to write off your "allowed expenses". These will be different depending if you do nothing and get labeled an "Independent Contractor" by the IRS for selling $601 in a year making you get a 1099, or if you decide to dive in and legally declare yourself a sole proprietor and actually try to make a profit.
A small business and any business can write off more expenses, than a 1099 Independent contractor. But either are allowed to write off expenses, and this is what made former President Trump a genius. He took advantage of all the laws and loopholes allowed under the laws, and so can you.
For example, if you keep good records of your sales, fees, costs, expenses, you'll be able to include many of them as expenses in your taxes. You just have to be able to prove it, and it has to be an allowed expense for someone who does what you are doing.
But it gets better, and this is why politicians who have never held a real job, ran a business or have never sold anything online were so angry with Donald Trump over his taxes. He "wrote off" his losses. The IRS allows you to "write off" losses, so you may have sold $1,000 worth of junk laying around your house, or you may have become a sole proprietor trying to make a "profit", by buying things to resell, but if your legally allowed expenses and deductions were $1,200, you took a loss. Instead of making a "profit" of $1,000 you technically loss $200. Donald Trump was a master of using these rules to his advantage, but how do you think Jeff Bezos and Amazon can pay near zero in taxes, while being the largest marketplace economically and Jeff Bezos being the second richest person in the world in 2021? It because Jeff Bezos, like Donald Trump, hired some really smart people to handle their taxes.
I am not going to give any advice on what you can or can not write off as a loss or include as an expense. There are lots of resources available for that kind of information online, or better yet, you can pay someone a few dollars who does small business taxes for online sellers and independent contractors to tell you.
But if you read through what I wrote above without becoming so triggered that your thinking became clouded, you now know that while congress and the current administration creates anti-competitive laws impacting even those at the lowest economic level, its not entirely hopeless.
Writing off allowed expenses and losses, has a lot of advantages by allowing you to invest in the tools you need to do what is being asked of you, better. A loss write off may even benefit you if you have a full time career in a higher tax bracket where you normally owe money, by decreasing the amount you owe. In some cases, the IRS may actually end up owing you money at the end of the year as a refund, because of your allowed expenses or a loss.
One last note, before I give you the actual text of the American Rescue Plan law that begins January 1, 2022. While writing off expenses and losses is an amazingly wonderful gift if it works to your benefit, never lie or cheat on your taxes, deductions, expenses or losses, or the IRS will kick your butt so hard, your anus will become your new mouth.
What does the American Rescue Plan act say?
The provision amends Section 6050W of the IRS tax code - the relevant language is contained in Section E:
SEC. 9674. MODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY NETWORK TRANSACTIONS.
(a) In General. - Section 6050W(e) of the Internal Revenue Code of 1986 is amended to read as follows:
"(e) De Minimis Exception For Third Party Settlement Organizations. - A third party settlement organization shall not be required to report any information under subsection (a) with respect to third party network transactions of any participating payee if the amount which would otherwise be reported under subsection (a)(2) with respect to such transactions does not exceed $600.".
It also states, "The amendment made by subsection (a) shall apply to returns for calendar years beginning after December 31, 2021."
Original Article Information [2017 to 2021]
A top question I hear as a reseller and a marketplace reviewer is "When does eBay report my taxes to the IRS".
Finding relative information for resellers big and small whether it be about State Sales Taxes or IRS Taxes can be relatively challenging despite the plethora of information available on Google and other search engines. So I decided to take it upon myself to provide the answer here on my reselling help blog.
I also discuss Taxes for Resellers on marketplaces like Ebay and Bonanza.com on my YouTube channel. Here are a couple of video links, but none of the current videos possess the information I am providing here on the Reselling Randy Blog.
So lets break down the current IRS Rule for the marketplaces that allow us resellers to sell our new and previously owned goods online.
The basic rule goes something like this, "Any marketplace that is involved in the processing of money, is required to report a seller on that marketplace once a 200 individual sales occur and $20,000 is created by those sales." That $20,000 is the Gross and not the profit. So all those final value fees you pay eBay when your product sells and on the shipping costs, any sales taxes and shipping costs are all part of that $20,000 threshold. Now for those of us who have been selling on eBay or Amazon in particular, we realize that those fees and expenses add up, making that $20,000 a lot smaller and faster to reach in reality.
Here is a more detailed breakdown of the 1099-K rule.
IRS regulations require all businesses that process payments to collect a Tax Identification Number (TIN) or a Social Security Number (SSN) for all sellers with more than 200 transactions in a calendar year, and to file a Form 1099-K for all sellers with more than 200 transactions and $20,000 USD paid to them in a calendar year.
How does this work?
1. You sell over 200 items but under $20,000 in sales in a calendar year.
= The marketplace is only required to request your tax id number or your social security number.
In the past two years, I've encountered a great many resellers visiting my YouTube channel in particular complaining because they were kicked off of eBay and/or PayPal for not providing a Social Security Number or Federal Tax ID. During those conversations, it became obvious that a great many of them simply were ineligible for such documents due to be illegal immigrants, or for operating from outside of the country via a third party connection within the USA. Once kicked off eBay and PayPal they jump to other marketplaces using either stolen documentation or alternative payment providers. Of course there are always those who open new accounts on eBay in particular using new bank accounts, e-mail address, even new names and stolen or borrowed social security numbers, but within two weeks or more, eBay kicks them off again. How? eBay and PayPal use a very sophisticated system to catch suspended and lifetime banned sellers on their marketplaces. Most criminal or illegal sellers who were caught the first time simply are not tech savvy enough to understand the digital trail of the internet and what it would take to start 100% clean on eBay, so they end up getting caught again. Even those paying out enormous money to buy eBay accounts from someone who sells eBay accounts will end up getting caught unless they had someone guide them through that process. The solution - don't operate illegally.
2. You sell 200 or more items AND your total sales is $20,000 or more in a calendar year.
= You will be required to give the marketplace your tax id number or social security number. The Marketplace will report your sales to the IRS and the Marketplace is required to send you form 1099-K to report on your taxes.
While we a marketplace is to collect a TIN (Tax ID Number) from sellers who have sold over 200 items, they are not required to report any information to the IRS unless the seller has sold over 200 items and has also had more than $20,000 in sales in a calendar year.
What is a TIN and who needs to provide one?
A Taxpayer Identification Number (TIN) is a number used by the Internal Revenue Service (IRS). If you are a sole proprietor like most resellers online, you can use your Social Security number, however, a safer option, assuming you are operating legally with a State Sellers Permit, any required city licensing and paying the IRS taxes, would be to get a Federal Tax Id Number to provide the marketplaces you sell on. This would help prevent your personal social security number from falling into an unscrupulous employee of the marketplace hands and from successful hacks on marketplaces in which your social security number ends up leaked for sale to the dark web,
Your TIN could be your Social Security Number (SSN), or if you run a business, you may have an Employer Identification Number (EIN) issued for that business by the IRS. Individuals can request a SSN through the Social Security Administration office near you. Business owners can apply for an EIN online at the IRS website. Here is the link to apply for a EIN
Under IRS regulations, all US sellers who a marketplace has determined likely to have more than 200 transactions on the marketplace during a calendar year is required to provide that marketplace with a TIN. On some marketplaces like Ebay.com and Half.com, If you have multiple accounts, they will all be taken into consideration when calculating your volume status. In other words, all of the sales from all of your accounts will be combined to determine if you meet the 200 transactions threshold, at which point you would be required to provide Ebay and/or Half.com with a TIN. If the combined sales exceed 200 transactions and $20,000 USD, those sales will then be reported on one Form 1099-K.
Smaller sellers rejoice
This is technically good news for lower volume sellers on eBay in particular. While eBay tracks your entire sales volume total from the first sale until present, the 200 transactions and $20,000 rule requiring a 1099-K gets reset every year. This means for example, if you have been selling on eBay for ten years and in year eleven your total volume of sales for the lifetime of your eBay account indicates you have sold $20,000 worth of items, as long as you didn't reach have 200 transactions and $20,000 in sales during year eleven, you won't get a 1099-K from eBay during year eleven, or reported to the IRS.
That also means, depending on what your state laws are about selling online, sellers permits and licenses, you may not even have to worry about the state coming and knocking at your door.
In my most recent YouTube video made two weeks before writing this article here on my blog, I candidly answer the question of a new eBay seller who had heard about the laws for selling online in California. In that video titled "Candid Thoughts About Ebay, California, Sellers Permits, New Sellers " I take a step back from all my previous videos that I had posted to YouTube about taxes and selling in California in which I simply regurgitate the law; and instead I reveal my personal thoughts about California's laws as a reseller on eBay, Amazon and other marketplaces, why I disagree with them, why they do not make sense for online sellers as currently written, why they are unfair to new sellers and other thoughts. While I want sales taxes and legal online sellers within California, I protest California handicapping new sellers and casual sellers who are cleaning out their closets on eBay and the heavy burden California's reseller laws place on these individuals. If you are interested, you can watch this video on YouTube.
So that is the 1099-K rule in a nutshell. Not all marketplaces currently follow those rules, especially those marketplaces that pop-up overnight. These rules and laws didn't exist when eBay and Amazon got started, in fact eBay and Amazon in particular are why these laws were created.
Here is a direct link to the IRS publication discussing the 1099-K and online marketplace regulations if you feel like reading the foundation of the law.
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Main Photo: Public Domain Photo