If you sell anything online and use a third party credit card processor like Stripe, Square or PayPal or sell through eBay, Etsy or the like, you have a big tax change coming.
How the Form 1099-K Worked Pre-2021
In the past, if you sold over $20,000 in 200 or more transactions, you would receive a Form 1099-K. The form itself is a little complicated because it reports the sales in each month in the year and only reports gross sales. It doesn’t show any reduce for rebates or refunds. But, the IRS is watching to make sure your business is reporting enough gross income.
If your business has a lot of refunds, you may have to show the IRS a reconciliation between the Form 1099-K and your tax return.
At least, it was only businesses who had over $20K and at least 200 transactions that had to deal with it. Small business, hobbyists or people cleaning out their garage didn’t have to worry abut it.
American Rescue Plan Act Changes Form 1099-K
The new rule is that the third party networks need to prepare Form 1099-Ks for all sellers who sell over $600. It doesn’t matter if it’s just one transaction. The rule is just $600 or more.
That means a lot of small sellers will suddenly have sales reported to the IRS and state agencies. It’s also made even tougher when we add in the changes that came with the Tax Cuts and Jobs Act of 2017 (aka Trump Tax Plan).
Effective 1/1/2018, hobby businesses could not take deductions against hobby income. So if you sell an afghan you crocheted, it’s 100% income. No deductions for the yarns, the pattern, the hooks, etc.
In the past, though, most people kind of skipped this step. Now with the new reporting, a lot of hobbyists will suddenly be looking at paying tax.
The IRS views everyone who sells something as either a business or a hobbyist. The hobbyist doesn’t get the deductions. The business does.
If you clean out your garage and sell it on eBay, you count as a “hobbyist” even though I’m pretty sure cleaning garages is not your fun hobby. It’s just that the IRS only has two categories.
What’s the solution? How do you avoid paying taxes on the full amount you receive, with no deductions?
Start a Business
If you sell items online, do it as a business. That way you will be able to pick up the deductions associated with your business plus possibly write off things like your cell phone, ISP, computer, home office, business use of the auto and the like.
There are 9 factors that the IRS wants to see to prove that you have a business and not a hobby. These break down to 4 main categories:
Operate in a business-like manner, Time and effort,
Past success in business by you or someone advising you, and Profit motive.
We will be covering this in more detail in later blogs and Livestreams via Facebook. Your goal right now, is to think about your hobby or sales just like they were a business.
Got a tax question? Here’s how to get your tax questions answered.