Demystifying the New 1099-K Reporting Thresholds
December 2022 update: The IRS announced that it has pushed back the new 1099-K requirements one year to allow taxpayers more time to prepare for the change. This year, you will only receive Form 1099-K from eBay if you were subject to backup withholding, exceeded the $20,000 and 200 transactions threshold, or live in a state with a lower reporting threshold.
If you sell items online, you’ve probably heard about new IRS 1099-K reporting thresholds that were supposed to go into effect beginning in tax year 2022. These new requirements caused much on eBay and other online marketplaces. In response to this, the IRS has pushed back the new requirements one year to allow everyone more time to prepare for this significant change.
To help keep sellers informed in the meantime, TaxAct® and eBay have partnered to help you understand these tax changes and what they will mean for the tax returns you’ll file for tax year 2023.
Recap of the IRS reporting changes for Form 1099-K
Previously, eBay and other online payment platforms were only required to report transactions to the IRS once you hit an annual threshold $20,000 in gross payments and at least 200 transactions. Due to the IRS announcement in December, these requirements remain in effect for the 2022 tax filing season.
Only those who were subject to backup withholding, exceeded the threshold of $20,000 and 200+ transactions, or live in a state with a lower reporting threshold will receive Form 1099-K from eBay for the 2022 tax year.
Beginning Jan. 1, 2023, these thresholds will drop significantly. With the change in these requirements, platforms like eBay must report payments totaling $600 or more in a calendar year, with no transaction minimum.
How you can prepare for income tax filing next year
Here are three key steps to help you accurately file your income tax return next year:
Practice good bookkeeping
It doesn’t matter if you are a casual online seller or operating as a small business — keeping detailed records is essential for tax purposes.
The best thing you can do is save your receipts and keep organized documents of all your transactions. Some of the most important records to keep track of include your cost of goods sold (usually what you originally paid for the item you are selling), shipping costs, any fees you paid when selling, and expenses for packing and shipping supplies. Be sure to keep track of any refunds paid to customers as well.
Tracking this information will help you determine your taxable income and prevent you from overreporting income that can result in an overpayment of income tax. Expenses like shipping and supply costs are generally deductible business expenses, so keep track of each item’s cost basis and the final sale price to determine the cost of goods sold. It’s also a good idea to take photos of the items sold and place them with your records.
Organized, detailed records will help streamline your income tax return whether you file on paper or use an online tax filing software like TaxAct.
Tax Tip: How long should you hold onto receipts? The IRS can typically audit tax returns filed within the last three years, so long as there is not a substantial error. Because of this, it is recommended that you keep receipts and other supporting documents for at least three years after filing your return, or until the statute of limitations expires. This can vary depending on when you filed (or didn’t file) — if you’re unsure, it’s probably best to hold onto the receipts and consult a tax professional.
Know how to use your Form 1099-K
The Form(s) 1099-K you’ll receive from third-party payment apps is an informational document designed to help you file your income tax return.
When filing, it is best practice to compare Form 1099-K against your personal records to ensure all your transactions are accounted for. The amounts reported on your Form 1099-K are gross proceeds, not necessarily income. To determine the income associated with each transaction, you will need to determine the cost basis of the item(s) sold.
It’s also important to note that transactions included on your Form 1099-K are based on the transaction settlement date, not the sale date. For example, if you sold an item on Dec. 31, 2022, but the funds did not settle through the payment app until Jan. 2, 2023, that transaction would show up on your Form 1099-K for 2023 instead.
How you report your online sales income depends on what you sell and whether you run a business. If you are a self-employed sole proprietor, you will report your business profits using Schedule C. If you are a consumer selling capital assets, you will report any profits as either short-term capital gains or long-term capital gains, depending on how long you had the item you sold. If you are a hobby seller not intending to make a profit, you’ll report that income as “Other Income” on your tax return.
If this is starting to sound like a lot, don’t panic. Reporting income like this as a first-timer is not nearly as daunting as it sounds. If you choose to file with TaxAct, our intuitive tax prep software will ask questions about items you sold and pull all the necessary tax forms for you to file.
Bottom line
There’s no need for online sellers to stress about their taxes next year. Think of Form 1099-K as a guide designed to help you determine your taxable income. Keep good records and understand that only your profits are taxable.
By following these essential steps, you’ll be setting yourself up to file with confidence next tax season.
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IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.
