Do you use PayPal? Sell on Etsy? If you do, say hello to the 1099-K! There are big changes ahead because the IRS and State governments don’t want you to forget about their share of your sales.
All you handmade, creative, and craft business owners who:
- sell finished items, digital patterns, or services on places like Etsy, eBay, Ravelry, etc.
- and collect your money through a third-party transaction network (TPSO) – like PayPal, Cash App, Venmo, etc.
Will be issued a (lovely new to you) tax form called a 1099-K for online sales totaling $600 or more starting this year (2022).
But I’ve never gotten a 1099-K before, why the change?
Previously, online sellers only received a 1099-K if they had at least 200 transactions that totaled $20,000.00 or more.
This created a really huge grey area (or a tax loophole).
Some of you will receive a 1099-K for 2021
Several states closed the tax loophole for 2021, including:
- Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year.
- Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions).
- Arkansas has a $2,500 threshold.
- Missouri has a $1,200 threshold.
So you will be receiving a 1099-K by the end of the month from Etsy, Ravelry, eBay, PayPal, Venmo, Cash App, Stripe, etc. if you live in one of those states.
There has always been a requirement for businesses to file 1099’s
For as long as I’ve been a bookkeeper (egads 38 years and counting) there has always been a requirement for filing a 1099 when paying others for goods and services a business purchased that had a value of $600 or more throughout the year.
That requirement is still in place today – when you pay someone (or another businesses) for goods or services with a check from your business checking account. Especially if the person you were paying was a sole proprietor or an LLC.
But then things changed…….
It became the norm to pay via PayPal, Stripe, Venmo, Cash App, your credit card, etc. and selling online became a thing. People weren’t limited to just buying goods and services locally and writing a check for purchasing goods or services became an outdated practice.
And then, because you were no longer writing checks – you were able to avoid having to issue or give 1099s to contractors and vendors because you were using PayPal or a similar service as your payment platform.
This actually should have pushed the reporting requirements to PayPal, Stripe, your credit card company, etc.
But it didn’t.
Federal laws said that these third-party payment processors didn’t need to file Form 1099-K with the IRS or send it to you if you had less than 200 transactions and $20,000.00 or more throughout the year.
So, if you are a consultant or a coach and you had 5 clients who paid you a total of $30,000.00 during the year – no 1099 was issued because it was less than 200 transactions.
Things are changing again and now PayPal, Stripe, Venmo, ect. have to report earning over $600
It’s taken the government awhile to figure out that this created a situation where those people who use PayPal, Stripe, Venmo, etc. have an easy ability to cheat (i.e., not report the income on their tax returns).
The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years.
What are you supposed to do with the 1099-K you get from PayPal, Etsy, etc.?
The money that’s reported on the 1099-K should already be in your bookkeeping system and will be included in what you report in Part 1 Income of your Schedule C on Line 1 Gross Receipts or Sales.
If you don’t file a Schedule C, then it would be reported on your Form 1040.
When you receive the 1099-K, it’s more for your reference, something to use to check your books for accuracy.
When the IRS receives their copy, they know too look for these amounts (or a larger amount) on your tax return(s).
Want more information?
- PayPal – New U.S. Tax Reporting Requirements: Your Questions Answered
- IRS – Understanding your form 1099K
Have questions about PayPal, Etsy, and the 1099-K?
Leave a comment below and I’ll be happy to answer them.