A little-known (and little-publicized) provision of last year’s American Rescue Plan Act is wreaking havoc on the community of people who sell goods and services on eBay, Amazon, Etsy, Shopify and other social media platforms. online retail. There’s been a lot of confusing talk in the media about this lately, so let’s start with the basics and get the facts straight.
Generally, if you sell stuff on one of these platforms for more money than you pay (in other words, a profit), that profit is income for you. You must report this income on your tax return each year and pay taxes on it, regardless of your effective tax rate.
If you make more than $1,000 selling stuff for profit on eBay, Amazon, Etsy, Shopify, or another retail platform, the IRS doesn’t want to wait until April 15 to get its money. You must report your income and pay tax in four quarterly “estimated tax” installments on April 15, June 15, September 15 and January 15.
Because the IRS doesn’t trust you to do it right, for the past decade it has required online payment providers like PayPal, Venmo, Cash App, and Zelle (heavily used by online sellers) that they send a statement of income (called a Form 1099-K) to online sellers who make more than 200 transactions through their service each year, totaling $20,000 in gross sales. A copy of this Form 1099-K is sent to the IRS and your state’s tax office (if your state has an income tax).
Now here’s where things get a little sticky. Form 1099-K only shows the gross amount paid to you for goods and services you sold online. PayPal, Venmo, and Zelle have absolutely no idea how much you paid for these goods and services, and therefore your profit on each sale. It is up to you to calculate the profits you generated from those sales and only pay the tax on the profit portion, not the full Form 1099-K amount.
If you treat your online sale like a business (and shame on you if you don’t), you report your total income, costs, and expenses on Schedule C of your personal tax return (Form 1040 ). Basically what you’re telling the IRS is, “Hey, I know the 1099-K form says I made $100,000 selling stuff online, but my profit on those sales doesn’t was only $40,000, so that’s the only income I have to pay taxes on. “
If the IRS doesn’t believe you, they will check your tax return and you will need to provide documentation to support your calculation of taxable profit.
The good news is that when you calculate your tax liability this year (for online sales made in 2021), you’ll continue to do so as you always have.
The bad news is that everything will change next year (for online sales made during 2022), thanks to the American Rescue Plan Act.
Starting January 1, 2022, online payment solutions such as PayPal, Venmo, Cash App, and Zelle will be required to send online sellers a Form 1099-K if they receive more than $600 in annual payments through the platform. The number of trades you make no longer matters.
The lower threshold means that online sellers will have to pay taxes on a large number of small transactions that they may not have reported to the IRS in the past. As a result, it will create a lot of headaches and paperwork, especially for people who sell only occasionally or treat their online selling as a hobby.
For example, you have a huge collection of classical music CDs and decide to sell them on eBay one by one. You do not plan to make it a business or a regular source of income; you just want to clean your basement or garage. The IRS doesn’t care. If you sell more than $600 worth of CDs this year and get paid through PayPal, PayPal will send you the 1099-K form next January. If you sell $1,200 worth of CDS — $600 with PayPal and $600 with Venmo — you’ll get Forms 1099-K from PayPal and Venmo.
What can you do about it? Basically, not much. Unless Congress changes the law (which could be the case if Republicans take control of Congress this fall, as some are predicting), there are only three things you can do:
No.1: If you’re not treating your online sale like a business, start doing it. Talk to your accountant about filing Schedule C as part of your personal tax return next year.
#2: Keep track of all the deductible expenses you can use to reduce your taxable income from online sales this year. (Buy CPA Bernard Kamoroff’s book “475 Tax Deductions for Businesses and Self-Employed Individuals: An A-to-Z Guide to Hundreds of Tax Radiations” and memorize it.)
#3: If you expect to generate only a small amount of money from online sales this year (less than $2,000 to $3,000 in gross sales), consider ending your relationship with PayPal , Venmo and Zelle and require your customers to pay the old-fashioned way: by checks, credit cards and wire transfers.
Ennico Cliff ([email protected]) is a syndicated columnist, author, and former host of the PBS television series “Money Hunt.” This column is not a substitute for legal, tax, or financial advice, which can only be provided by a qualified professional licensed in your state. To learn more about Cliff Ennico and other Creators Syndicate writers and artists, visit our webpage at www.creators.com.
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