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Sun Mar 7 2021 16:45:14

New Bill Puts Micro Sellers in Crosshairs of the IRS

By: Ina Steiner

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A provision in the American Rescue Plan Act of 2021 (aka the COVID relief bill) would put some people's online-selling activity in the crosshairs of the IRS. 

Some might say rightly so, but even people who sell their old stuff when cleaning out their basements and garages should sit up and take notice. 

If you use PayPal, eBay, Etsy, or any electronic form of payment processing to collect money from buyers, you will be impacted if the amount a single entity processes on your behalf exceeds $600.

Many online sellers are familiar with IRS Form 1099K, which marketplaces and payment processors send out each January to sellers who've exceeded $20,000 in gross receipts when collected in over 200 transactions. (For example, if you process $21,000 in 199 different transactions in a single tax year, the payment processor is not required to file Form 1099K, though what thresholds each company employs in practice we don't know and may vary.) 

A provision the 2021 Rescue Plan Act would lower the threshold considerably - it would require companies to send a 1099K to sellers for whom they've processed over $600, period. In our reading of the bill's language, it appears if you sell $601 worth of items, even in a single transaction, the payment processor is required to file Form 1099K.

The provision amends Section 6050W of the IRS tax code - the relevant language is contained in Section E:

SEC. 9674. MODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY NETWORK TRANSACTIONS.
(a) In General. - Section 6050W(e) of the Internal Revenue Code of 1986 is amended to read as follows:

"(e) De Minimis Exception For Third Party Settlement Organizations. - A third party settlement organization shall not be required to report any information under subsection (a) with respect to third party network transactions of any participating payee if the amount which would otherwise be reported under subsection (a)(2) with respect to such transactions does not exceed $600.".

It also states, "The amendment made by subsection (a) shall apply to returns for calendar years beginning after December 31, 2021." (We think that means it won't apply to transactions processed in 2021 - stay tuned.) 

It might catch "consumer sellers" by surprise and, once understood, might discourage them from listing on sites like eBay, Etsy, Poshmark, and Mercari, and encourage them instead to seek out classifieds-style sites like Craigslist and Facebook Marketplace, where transactions are often handled in-person with cash payments.

But the new provision may also impact casual sellers who do more than clean out their basements - even though they are supposed to report their earnings to the IRS whether they consider themselves "hobbyists" or not. 

IRS Form 1099K first applied to payment processing in tax year 2011 - it was crafted as part of the Housing and Economic Recovery Act of 2008, which included the provision as a mechanism to achieve a more precise tally of electronic transactions.

Seven years later in 2018, some sellers got a big surprise when they received 1099Ks, even though they were under the 1099K threshold. It occurred after Massachusetts and Vermont had retroactively passed new laws requiring payment processors to file 1099Ks for sellers who processed at least $600 in 2017, and no matter how few the number of transactions they processed. 

Other states may have hopped on the bandwagon since then, and it comes as little surprise that a few years later the Feds may be joining the party.

While Form 1099K isn't new, we published a refresher last month by tax guru Barbara Weltman: "What You Need to Know About 1099-K."

With all the provisions of the new bill, this particular one has flown under the radar - we began hearing reports this weekend, including an article in Politico on how it may impact gig workers like Uber drivers. 

Note that freelancers have always had payments over $600 reported to the IRS from the companies hiring them via Form 1099-MISC.

The House of Representatives passed the American Rescue Plan Act of 2021 legislation on February 27, 2021 and the Senate passed a revised version on March 6, 2021. (We believe the provision impacting 1099Ks remained intact in the Senate version.) The bill goes back to the House, which must approve Senate changes before the legislation can be signed into law by President Biden.

According to CNN, the bill includes some good news for small businesses such as funding for small-business loans and grants, as well as many other provisions, including aid to states and municipalities.

Comments (41) | Leave Comment | Permalink
Readers Comments

Perminate Link for New Bill Puts Micro Sellers in Crosshairs of the IRS   New Bill Puts Micro Sellers in Crosshairs of the IRS

by: comments This user has validated their user name.

Mon Mar 8 01:07:29 2021

This is why you can't vote for Democrat's. That crap they always spew about "tax the rich" "make the rich pay their fair share" "new taxes on the wealthy". Virtually every tax was sold to the public as a tax on the rich and everyone else need not worry. In ALL cases those taxes were refined and expanded quietly. Federal income tax was supposed to be only for the "richest" Americans but with more revisions come more people affected, and everyone pays it.

The 200 transaction and $20,000 threshold was also a poison pill snuck into a piece of legislation that helped bail out home owners after the 2008 crisis. This is just the democrats back for round 2 with another poison pill. Not only is this a new tax levied on people that "earn less then $400,000" but you no longer have the right to sell your own property. At least those of us selling over $20K and 200 items save our receipts because we really are businesses and can calculate profit/loss but how do you prove what you paid when selling your old purse or that exercise bike you never got around to using? How do you prove that gaudy ring you inherited cost something?

This is seriously one of the biggest tax hikes on the poor in American history! The poorest Americans are most likely to sell their property when times get tough. The extra "income" could cause a ripple effect that could have you paying back Obamacre subsidies, cost you tax credits, take away portions of your income tax returns, and cause tax problems the poor can't afford to fix. Not to mention the poorest American's usually qualify for free filing, but now will require complicated and expensive business tax returns to complete schedule C. Time to go back to predatory payday loans and pawn shops :(  

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by: BobNJ This user has validated their user name.

Mon Mar 8 01:07:53 2021

Question is will PayPal be able to separate sharing bills and personal reimbursements, gifts, etc. vs online ecommerce sales?

Many collectors are already using collector bulletin boards for buying, selling and trades to avoid the fees of selling on places like eBay and others.

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by: Junk in the Woods This user has validated their user name.

Mon Mar 8 06:45:47 2021

The voters have spoken. And this is the type of garbage they deserve.

We would all be far better off if we just gave the goverment everything we make and let them spend it. They are obviously far wiser than we are. A bare subsistence living is all we deserve. After all, we are simply the unwashed Proletariat.

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by: Chicago48 This user has validated their user name.

Mon Mar 8 07:10:03 2021

Oh well.  They can't catch you if you sell through flea markets, or peer to peer sales.  That's the last bastion for small sellers.

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by: PoorMan This user has validated their user name.

Mon Mar 8 07:27:39 2021

Anything to crush the little guy & track his every move-1984 is alive & well under this Marxist regime.

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by: Disgusted This user has validated their user name.

Mon Mar 8 10:19:25 2021

Anyone who didn't see this coming should not be selling anything  online.  Basically everything you sell online that is used, such as kids toys, clothes that were outgrown comes under the heading of taxable income.  While you just try to recoup some of the money it cost to raise your kids.
The number of Flea markets and yard sales will be going way up.  
I consider this move a tax increase for the poor.  (Someone spread ''misinformation''. ????  last fall )

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This user has validated their user name. by: Ina

Mon Mar 8 11:09:29 2021

Pointing out that the 1099K is not a new tax in any way. It's meant to make sure that people who owe taxes pay taxes - not sure that's a principle that one political party embraces more or less than another.

If I earn over $600 writing freelance articles for a publication, it must issue me a Form 1099-MISC. That's not new.

The problem with the new threshold for 1099Ks is that it seems to equate selling a relatively small amount of things at a yard sale (but online) with working a job or "gig."

I'm wondering what readers think the threshold for 1099Ks should be. Or do you really think selling online should be tax-free?

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by: railady This user has validated their user name.

Mon Mar 8 11:39:18 2021

@Chicago 48 - It appears to be back to the future !  

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by: railady This user has validated their user name.

Mon Mar 8 11:53:50 2021

Between the biased media coverage and the Democrats, the voting public did not get anything like ''we report, you decide'' news coverage from which they made up their minds about who to vote for. This administration is one-party rule and is going to steamroll us with non-essentials and waste-money projects.

I would love to sit back and say ''I told you so'' to people who voted for them, and I would love even more to see the reaction when those folks get hit with the bills (just for one, our gasoline has gone from $2.49/gallon to $3.89/gallon over just a few weeks) but my worst fear is Cancel Culture and a Marxist/Socialist government taking over -- which will mean you can bet that voting will never be ''fair'' again.

I'm not trying to go off track but this 1099K thing is indeed a political issue, especially since it was included that legislation. It is not a ''tax'' in itself, but with payment processors having to take on EXPENSIVE new procedures you can bet they are going to pass the costs along to us who use them.

And no, don't expect PayPal to sort out anything. I can't even sort out personal vs. business transactions. It is ''Money In - Money Out.''

It's possible I am missing something, let me know if I am, but I have not been able to figure out how to sort out personal transactions from the inclusive calendar year spreadsheet (all transactions) I can get.  

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by: rhw1 This user has validated their user name.

Mon Mar 8 12:03:34 2021

Having been probed by the IRS, one can combat the 1099K. Keep in mind, you are selling items YOU paid for. So, if you have ''receipts'' from those items, and admittitledly most dont, you can actually claim the loss, as if you bought the item way back when for say $20.00 and sold it online for $5, you have a $15.00 LOSS. Remeber if you have income, you have to have some expenses! Most casual sellers dont see the costs involved selling on ebay. THose of us who do it for a living, have had to learn the hard way and quickly. I live in Illinois. Late January/early February I got 1099k's from ebay, paypal and square. Now (and no laughing please) I had already planned to claim every last dime I recieved, as I realized during my probe that the IRS knows way more about your banking than you realize. But I was surprised that I got the 1099k's. Until I found out that  Illinois is now one of those states of $1000/6 transactions states. I was under the impression it was 20k and 200 transactions, but like I said, I was going to claim all of it anyway. But eveyone need to look at their books. You have the listing fees, the FVF's, the payment processing fees, the boxes, the MILEAGE TO AND FROM THE POST OFFICE, etc, etc. Use this to lessen your disadvantage!
Oh, lastly, my accountant is convinced that when Paypal sent out the sample 1099's in 2011 many were actually forwarded to the IRS. After 4 years of fighting, and most of it I did on my own, my fine went from 60k I OWED to a 5k additional refund.  

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by: Mark4 This user has validated their user name.

Mon Mar 8 12:19:57 2021

and just like that the inventory on ebay is cut in half while facebook markeplace soars. The cash in the driveway sale is the main way go moving forward.  

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by: teufelwolf This user has validated their user name.

Mon Mar 8 12:35:25 2021

So who put that bit into the bill?  

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This user has validated their user name. by: iheartjacksparrow

Mon Mar 8 13:20:21 2021

If the Government would just stop wasting money, they wouldn't need to tax the small seller. For the year 2020, with Social Security, the dividends I get on investments, and my sales online, I took in over $100K. Yet the stupid Government is sending me Covid relief pre-paid cards. How dumb is that?  

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by: cillianred This user has validated their user name.

Mon Mar 8 13:40:13 2021

Those saying this is a "Democrat" thing...come on. While I'm not saying it's right or that I agree with it, BOTH sides (Republicans AND Democrats) add  tidbits like this in bills ALL. THE. TIME.

For instance, the original law that started requiring payment processors to send out 1099k's was part of the "Housing and Economic Recovery Act of 2008".  It seems to me that reporting income from online sales had little to do with the main part of the bill, but there it was. And, that bill was passed with a bipartisan majority and signed by Republican Pres. Bush.

I get so tired of the partisanship that has been happening in this country in recent years. It should be country over party, NOT the other way around.

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by: Silver Ice King This user has validated their user name.

Mon Mar 8 14:21:30 2021

@rhw1

Congrats on converting that balance owed to a refund, but was the extra $5K refund really worth all the work you had to do during those 4 years??  Truthfully I wonder if looking at it as a gain of $65K would even manage to have been worth all of the stress and aggravation.

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by: Silver Ice King This user has validated their user name.

Mon Mar 8 14:42:42 2021

I get so tired of the partisanship that has been happening in this country in recent years. It should be country over party, NOT the other way around.


I wholeheartedly agree with this statement, but I just do not see it changing anytime in my lifetime as both parties have become entrenched in this way of voting.  It is no longer about what the people need or want, but what will benefit my chances of getting re-elected in the next election and nothing else.  If Congress had just stuck to the original bill we would not have all of this crap, but once again politicians looking out for themselves have once again added so many items to the bill that they know would never pass on their own have made a bill to help the people into a monstrosity that is going to wind up costing the people more than they are going to be receiving in this so called relief effort.  

I have always reported all of my online revenue and feel that those that sell as a business should have to report their earnings.  But the $600 limit is so old and has not been adjusted upwards ever that I can remember despite all of the inflation and other increases in things like the minimum wage.  I would say a reasonable new minimum reporting amount should be put at around $1750-$2000 with say 50 or so transactions as that would usually sort out most of those that are just selling old clothes and other used items to help pay for new items versus those that are truly in business.  Either way that is a lot more reasonable than still using $600 as the basis for starting to report sales income, which is saying that Gross Sales is the same as Net Profits if $600 in sales is now reported as if it were $600 in Gross Revenues from a Service performed.

Also one other deduction that was not mentioned above is the cost of accessing your online provider which can be a very significant cost depending on if you are bundling it with other things or as i do paying it separately so that I have the best online service available in my area.  My cost may be double what it could have been but the quality of the service i receive is worth a heck of a lot more than the savings would ever have been.

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by: Silver Ice King This user has validated their user name.

Mon Mar 8 14:45:52 2021

Just to clarify what I meant - the $1750 - $2000 minimum would be for a 1099K, although i do think that the 1099 Misc minimum amount should also be increased to say $1000 or so since wages and cost of living have increased so dramatically since this amount was first created.

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by: AnotherTime This user has validated their user name.

Mon Mar 8 14:47:12 2021

If you are selling, you are generating taxable income and it has to be reported.  1099K is a form and not a new policy.  Doesn't matter whether you are a hobby or a business.   But the lower  amount is very troubling for sure!  I'm sending this article to my congressional rep today!

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by: Vox29 This user has validated their user name.

Mon Mar 8 15:08:48 2021

I just see the adjustment as a cost of doing business. And I am not opening any garage sales anytime soon. People don't realize that the standard deduction on the 1040 ($12,400, for example) will wipe out the tax obligation, and they shouldn't worry about $600 being the floor for 1099 earnings. You guys are panicking too early. If you want to switch to cash sales in person, remember that we are in a pandemic and the risk of contracting Covid from in person sales is greater than owing tax on the 1099 earnings. Think about it.

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by: cillianred This user has validated their user name.

Mon Mar 8 15:46:47 2021

@Silver Ice King

" It is no longer about what the people need or want, but what will benefit my chances of getting re-elected in the next election and nothing else. "

You hit the nail on the head.



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