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.
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.