Very few people are aware of the relatively new tax form 1099-K. It was developed a few years ago to report transactions for businesses that take in money from credit card companies. The purpose is to force retail businesses to correctly report their gross income, and this form is a tool that gives the IRS a partial look inside of a business’s cash flow, making it harder for fraudsters to claim that they had little or no income. The form as originally designed was only supposed to be triggered for businesses that took in over $20,000 or had over 200 transactions per year, which left out the vast bulk of people who transacted money through credit cards or payment platforms like Paypal.
Thanks to the Covid-19 pandemic, congress passed a law in 2021 that will radically change how this form is used. The American Rescue Plan, touted by many as a saving lifeline during the pandemic, had to offset some of the money it was giving out, and one of the things they did was lower the $20,000 threshold for the 1099-K down to $600, guaranteeing that many hidden side-hustles and hobbies would be forced to report income and pay tax.
What does this mean exactly? It means that starting in 2022 and beyond, business platforms will be sending out vastly more form 1099-Ks to millions of Americans (and the IRS), who will then have to incorporate them into their tax returns or face penalties. Specifically, it will affect sellers, workers, and renters who before were on the honor system to report their income. Let’s look at each.
- Sellers. If you sold an item on sites like Ebay, Etsy, Stubhub, Shopify, Poshmark or any other third-party marketplace, and received over $600, you will get a 1099-K from now on. If you don’t report it on your taxes, you will most likely get a computer-generated letter from the IRS, who will assess tax on it as best as they can. (Direct, person to person sales on sites like Facebook Marketplace and Craigslist won’t be affected). Sometimes these sales end up not being taxable, such as a piece of furniture you sold for less than you paid for it. But for a profitable sale of collectible items like coins or jewelry, these items are taxed at a much higher rate than usual. How to report all this depends on a number of factors- are you selling inventory, Grandma’s silverware set, or some old clothes you don’t want anymore? In each case you’ll need the original value when acquired and the property category that it belongs in. For those who sell items frequently online, the burden rests on them to keep records on the items being sold.
- Gig Workers. Self-employed people who work through online platforms like DoorDash, Uber, Lyft, Instacart, Rover, Grubhub, Amazon Flex, or Upwork will now get 1099-K forms if they earn over the $600 limit. These 1099 amounts in most cases need to be reported on schedule C – Profit or Loss from Business. In addition to the amounts from 1099-K, businesses are supposed to report any other income from all sources, and then take business-related deductions to arrive at a net profit. The net profit is what’s taxable for both income and self-employment taxes.
- Renters. People can rent almost anything through the sharing economy. Homes and vacation property are rented through Airbnb and VRBO. Cars are rented through apps like Turo. Equipment can be rented through apps like Sparetoolz, and even swimming pools can be rented by the hour on app Swimply. All of these apps were previously limited to $20,000, and now will report on gross incomes of $600 or more. Rental businesses are handled differently than sales or gig work and reported on schedule E- Rental Income, which requires computations of total income, regular expenses, and depreciation expenses.
- Personal use. There is some question about how the money that is sent via apps like Venmo, Paypal, CashApp, or Google Pay will be reported. Many of these transactions are of a personal nature and not reportable. Reimbursing a friend, giving a gift, or buying concert tickets are not taxable transactions, and no personal transaction should show up on a 1099-K. Transactions that are of a business nature also show up on these platforms and need to be treated correctly. It’s up to the recipient to make sure that their accounts coded as either business or personal while setting them up.
A note on hobby income. Activities that bring in money but are mostly for pleasure are considered hobbies and treated differently on a tax return. A true business must have an intention to make a profit, and all expenses would be deductible on Schedule C. Hobby income, however, is treated as regular income and as of now no expenses are deductible (until 2025). Making and selling crafts on Etsy, for instance, could be considered a hobby, or it could be considered a business, depending on how the person approaches the activity. Be aware of the rules that set these two categories of income apart. For more details on the 9 factors that the IRS uses, go to IRS.gov.
Sharing economy apps are now gathering tax information from their users in preparation for this big change. People who use these apps and websites need to be prepared before the flood of 1099-K forms start coming in January of 2023.