Are you selling items online or receiving payment for goods and/or services on platforms such as PayPal, Venmo, eBay, Zelle, Etsy, or Cash App? Online platforms are the preferred method of shopping for most Americans. These platforms also support the gig economy and, what has to date been, the potential for some tax free income. That is all in the process of changing.
The American Rescue Plan (2022) enacted a $600 reporting threshold for many forms of online transactions. Online platforms must provide sellers with a Form 1099-K for any “third party settlements” (read: receipt of payment for online sales or services provided). The Form 1099-K reporting requirements will not apply to personal transactions as consumers acquire birthday or holiday-related gifts, share a meal, split the cost of a ride-share, or pay for a household bill.
Third-party marketplaces, platforms, settlement organizations, or digital wallets are now required to provide those who receive online payments an IRS Form 1099-K when the amount received exceeds a specific threshold or number of transactions. This includes, but is not limited to:
- Online Auction Websites
- Marketplaces for Crafts or Other Goods and Services
- Online Resale Marketplaces
- Ticket exchange or resale platforms
- Ride Sharing applications
- peer-to-peer payment applications, websites, or digital wallets
- Crowdfunding sites
The good news is that most of those selling products online and those receiving payments for services rendered through an online platform have a little more time. The IRS delayed plans to implement the $600 reporting threshold based on its news release #IR-2023-221 (Nov 2023). Providers were to provide U.S. taxpayers a 1099-K if the taxpayer received more than $20,000 or conducted more than 200 transactions through a third party in 2023.
The present threshold for 2024 stands at $5,000 with no transaction minimum (to be reported on your personal income tax returns, the vast majority of which will be due in April 2025). This provides the IRS and the third-party providers time to adjust to the original $600 reporting standard established under the American Rescue Plan.
Practically speaking, U.S. taxpayers will need to focus on their online activities and sources of income. The online sales you make can be divided into “business” sales (which would need to be reported) and “hobby” or online “garage sales” (which generally do not need to be reported).
Let’s begin by discussing the latter. Things you would sell at a garage sale (used clothing, sporting goods, and other personal-use items) can typically be sold online without reporting sales to the IRS. Many items you’d advertise on sites like Craigslist or Facebook marketplace would fall into this category. The one exception to “garage sale” items is the sale of antiques and rare collectibles that can be sold for a significant profit. To be safe, you may consider reporting these sales to the IRS.
Those selling items online, especially higher-ticket items, must be aware of the $5,000 threshold for 2024. What if the IRS reduces the limit to $600 in 2025 (reported on 2026 tax returns)?
If you sell new and homemade items online but do so on a small scale and without intending to make a profit, you probably will not need to report sales to the IRS. These are considered “hobby sales.”
At the established threshold, however, hobby sales can become a business. If you frequently sell craft items online with the intent of making a profit, this would generally be considered a small business by the IRS. As such, you would be required to report income from online sales and to pay taxes.
It is important not to misconstrue the 1099-K reporting thresholds above with your responsibilities as a U.S. taxpayer. The IRS (and the State of California) require taxpayers to report and pay appropriate taxes on all income, worldwide. Ignorance of the law is not an excuse for the IRS or any state tax agency.
This is why you need to consult with a tax attorney at Janathan L. Allen, APC and the accounting and tax professionals at Allen Barron. We will help to review your activities, receipts, income, and reporting responsibilities while providing insight and guidance.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
