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Sat Jan 22 2022 11:29:47

What's Left Out of the $600 Reporting Threshold Debate

By: Reader

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Dear Ina,
This is regarding the 2022 1099-K $600 threshold. The literature that says if you are selling your personal items casually you WON'T have to pay taxes is a bunch of horse hockey!!!

As a seller and a former CPA here is the real deal as to why it is such a burden:

I will use a recent sale of mine as an example:
Item sold for $30
Shipping $9.50
Sales Tax $3.51 
eBay Fees $5.70
Actual Shipping Out $9.04

On this transaction my actual earnings WITHOUT considering the cost of the item were $24.76. On my 1099-K eBay will report that I earned $43.01. So how do I deduct the $18.25 in expenses?

There are 2 ways to report the earnings:

As a casual or hobby seller on Schedule 1 of form 1040 or as a business on Schedule C.

If I don't report anything (like the literature is saying) it will raise a huge red flag with IRS and I become vulnerable to audit.

So I report the $43.01 on schedule 1. How do I deduct the expenses? I have to list them on Schedule A as an itemized deduction. If my total itemized deductions are less than the standard deduction, I cannot deduct anything and will have to pay taxes on the entire $43.01.

Scenario 2: I report it on Schedule C as a business. So I deduct all the expenses and have my $24.76 to report on my 1040. The problem is NOW I have to pay self employment tax on that $24.76 which is 15.3% PLUS my regular income tax rate on that $24.76.

There are other deductions that can be made on Schedule C and I did not include the cost of the item just to make my example simple.

For the small casual seller this is a no win situation. There will be millions that have no clue about the truth of reporting this income and will have a surprise when they file their 2022 taxes!

Congress has to Act to increase this threshold!
This is going to hurt the little man!
Teta

Comments (37) | Leave Comment | Permalink
Readers Comments

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by: Snapped This user has validated their user name.

Sat Jan 22 14:34:25 2022

This example neglects to consider the cost ‘basis’ of the item sold.  What was ‘paid’ for it - with specific adjustments a tax advisor can illuminate based on item use, age, current market value, etc. - is also deductible from income.

It also does not consider any deductions for the ‘business expenses’ related to creating this ‘income’ (or loss), which are also deductible.  Paper clips, gas money, internet and data services, possibly even down to the air donut for your work chair are all deduction candidates, just to name a few.  A Pro can name the rest.  

All these things may easily reduce any remaining ‘profit’ from the OPs example to zero, or near enough to be negligible, even with other ‘self-employment’ tax threat hanging. In certain cases, any ‘loss’ can actually offset other income, reducing tax due overall.  

No argument though, this will result in a bigger bookkeeping headache that will cost more to administer than it will be worth skimming from Mom & Pop enterprises.  

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by: BatmanOfOz This user has validated their user name.

Sat Jan 22 15:56:11 2022

And This is why I am letting all of my ebay listings end and will Not be relisting them....until and unless this nightmare ends and common sense returns!

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by: terry55 This user has validated their user name.

Sat Jan 22 19:36:47 2022

the biggest nightmare will be the million's of 1099's going out with the shape the IRS is in  

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This user has validated their user name. by: iheartjacksparrow

Sat Jan 22 22:42:15 2022

"There will be millions that have no clue about the truth of reporting this income and will have a surprise when they file their 2022 taxes!"

I think there's been enough publicity about this that anyone who doesn't know about paying taxes on marketplace income must not be reading or listening to any news reports. The IRS has great publications that answer just about any question someone could have about preparing their tax forms (if someone doesn't want to go to an accountant or tax preparer). I use tax software for small businesses which walks me through everything and questions me about every possible deduction.

I realize that $600 sounds low, but it is what it is, and I doubt the government is going to backtrack.

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by: comments This user has validated their user name.

Sun Jan 23 00:36:33 2022

You never have to pay taxes on money you didn't earn. You will have to file a schedule C and explain your innocence though.

Fortunately build back better failed to double the size of the IRS and harass all those $600 reporting tax payers. This is going to leave more problems then it solves when the IRS is inundated with minor clerical errors that are bound to be plentiful on those trying to learn how to file complicated returns or lost receipts.

$600 was waaaaay to low a bar. At least they should have done $5000 or something that makes more sense. At current rate of inflation, $600 will barely a weeks worth of groceries pretty soon.

One thing that will be interesting will be to see is how the "top secret" computer program is adapted that selects who to audit. Will errors become so frequent on $600-$1000 schedule C's that they will target the poor with the same ferocity they currently go after home office or mileage deductions?

Many people sell possessions to declutter.......but many more do it because they have to eat. This new law actually seems quite cruel and might disproportionally harm the poor. Imagine a mother selling her wedding ring to feed her babies.....only to be hit with an audit only to compound the problem with a tax garnishment on their meager paycheck when they can't show the receipt or afford representation at the audit.

How many people out there have had to, or know someone who has had to sell and heirloom or item of value when times got tough? Everyone should pay their fair share, but this wasn't the way to find cheats :(

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This user has validated their user name. by: Lightning

Sun Jan 23 02:37:33 2022

''There are other deductions that can be made on Schedule C and I did not include the cost of the item just to make my example simple.''

The things you left out to make it ''simple'' are the most powerful items used to bring your *potential profit* down to something manageable, possibly zero, possibly a loss.  If you want to tell a true story, you can't just pick which parts to include.  You have to tell the whole story.

Automaker: ''We left the engine out that car you just bought to keep it ''simple''.

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by: papergoy This user has validated their user name.

Sun Jan 23 10:32:46 2022

And you pay your FICA on your earnings as you should, which increases your earnings for Social Security purposes, and years down the line get a greater benefit as you paid in based on your earnings- not certain exactly what the argument is- you report the income, pay the taxes including FICA and eventually (hopefully) reap the benefits.  Plus you can sleep at night knowing you've followed the law- not certain how you could sleep at night prior to this, but at least now you can start doing things properly.  

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by: I Must be Crazy This user has validated their user name.

Sun Jan 23 13:44:07 2022

The numbers are what they are. The reality is, there are many sellers that have been skirting income reporting requirements for a long time. This new threshold will put an end to that.

Reality is, selling online at the hobby or occasional level will pencil out to not being worthwhile for millions of sellers. That is bad for many platforms such as eBay.

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This user has validated their user name. by: Rexford

Sun Jan 23 17:24:25 2022

To the OP--it's called record keeping, which all businesses (large and small) have to do.

If you have never heard of it, it's time to learn it.   There are advantages to record keeping.  Any expense that you incur that is related to your business is deductible.   And if you are earning less than $1000 on the items you sell online this should be incredibly easy.

I'm a bit taken aback that a legitimate CPA has any questions or concerns about this.

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by: Small Potatoes This user has validated their user name.

Mon Jan 24 01:15:59 2022

The problem I will have, as will countless other casual sellers who sell more than $600 in a year, is that I am decluttering and I don't have receipts for these things (a few items are >$100, but most are <$50) that were purchased years or even decades ago, or that I inherited. The IRS requires documentation to establish a basis, and I don't have any for the vast majority of these items, so I will have to pay more in taxes. I know, too bad for me. I have to take that into account when I decide to sell each thing and weigh the options of donating it or trying to sell it for a pittance at a garage sale (I don't do CL or FB). Certainly it makes little sense for me to sell low-dollar items on ebay now. Eventually, maybe not so much this year but starting next year when casual sellers get their 1099s and figure this out, you'll see fewer small-time sellers on ebay and elsewhere.

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This user has validated their user name. by: Marie

Mon Jan 24 01:43:00 2022

Teta

As others have said, in your letter you omit some extremely important things.  And since you say you are a former CPA, it is down right surprising.  You are here trying to create concern about something that you yourself are not being as forthcoming as you should be able to do with your background.

What causes a lot of the confusion on this subject is the BAD information that keeps getting circulated.  

The fact is anyone that does get a 1099K for 2022 will need to claim it when they do their 2022 Federal tax return.  For those that are ONLY selling their own stuff, they will likely be just fine without any additional income taxes to be paid, but they will need to fill out the proper forms.

The small investment in a program like Turbo Tax or one of the other ones is likely money well spent.  It can be an enormous amount of help to many of us.

While this is something that will affect many casual sellers that only sell stuff they have owned for years, there are also those that just have never bothered to report their income to IRS if it was below the OLD threshold of 20K.  There are likely more of these kind of sellers than anyone is willing to admit.

There those that receive state and/or federal benefits that also don't want to claim the income or run it through their bank accounts.  It was much easier to hide money in PayPal prior to 2022.

Lots of time to research your own personal situation and LEARN the FACTS.  Start there and then decide what is best for you.

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by: owl3606 This user has validated their user name.

Mon Jan 24 02:14:42 2022

I believe you don't pay self employment taxes when you end up under $400

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by: Chicago48 This user has validated their user name.

Mon Jan 24 05:44:22 2022

And This is why I am letting all of my ebay listings end and will Not be relisting them....until and unless this nightmare ends and common sense returns!
^^
I haven't listed on Ebay in a week and I sleep well at night.  I delisted all my listings because of the micro-managing robot, and I sleep well at night.  I now concentrated on AMZ Merc & Posh listings.
As for filing taxes, our tax filing system is a MESS and has been for several years and it gets worse with each President and Congress.  Nobody knows nothing.  There's a saying, "KEEP IT SIMPLE STUPID", but our tax system complicates it more and more in the quest to find "cheaters" and "system beaters."  Why don't we just get rid of sales tax and tax and go with Consumption tax.  Why not tax internet trades on stock instead of having us file for every profit and loss on stocks? There are times right about now, Jan-Mar, when I want to go hide because of the complications of tax filing.

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by: I_Fix_Dolls This user has validated their user name.

Mon Jan 24 06:06:52 2022

Being on near poverty level social security and over the age of retirement, I took to selling stuff I had bought over the years, because before that, I was living on credit cards, building debt with 22-24% interest.  Now making a few dollars a week, with the venues taking at least 25%. I still make enough so I can avoid using the credit cards for food and other things I have to have. (Although I still have about $15,000 in CC debt) So now the government wants to scrutinize every penny, and try to take as much as they can. Yet Jeff Bezos makes a MILLION DOLLARS every 8 MINUTES, is worth about 200 BILLION, pays no taxes and gets basically paid by the government to fulfill his little boy dream of being an astronaut.  F*@k that.

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by: Teta This user has validated their user name.

Mon Jan 24 08:38:21 2022

My original post was not addressed to the professional seller that never reported their income.  It was addressed concerning the unknowing, casual seller who is basically decluttering.   I personally know dozens of people who sell like this and have no clue about the new reporting threshold.  They didn't even know about the old threshold.   I realize that those reading this board are online selling savvy.  But the average person isn't.  
The reason I left out the cost of the item is that for the average declutterer they have no clue and most importantly cannot PROVE it should they get audited by the IRS.  Many are just cleaning out deceased relatives items or their own items.   How do you assign a cost to your grandmother's Rosenthal dishes or your mother in law's Pyrex bowls or the glasses your parents got free from the gas station???
Then there are the people who sell from their closet so they can buy more!  Do you think they keep the receipts from the pair of pants they purchased 3 years ago??
Does the average casual seller who is decluttering know to log every mile they travel to the post office or to the store to buy ink?  No!
This is my concern.

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by: 4yourinfo This user has validated their user name.

Mon Jan 24 09:37:01 2022

FYI you always have to report income even less than 600.00. The big wonderment is why is the IRS going after a couple of dollars clearly anyone making under 2k dollars is some little guy trying to sell a random item here and there it's far from a business. It must've been some over zealous lawmaker who decided all these people on programs are all scamming the system making money on the side.. this money is a joke it's 1400 that was possibly going unreported and 3/4 of the 1400 is going to be reported as expenses. The IRS is left with 350 unreported income what is that 45.00 and if the person dumps it into an LLC with a passive partner it's less than 25.00! So you're going to say people have multiple places where they are going to get these 1099k let's say it's 3 so lats less than 200.00! It's a joke a waste of everyone's time - the accountant will probably be the only ones gaining.  

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by: papergoy This user has validated their user name.

Mon Jan 24 09:56:56 2022

Re: the poster above living just above the poverty level on social security- then odds are you won't owe anything other than potentially FICA as there are standard deductions etc.  But look at it this way- all this time you've been potentially undercutting me and not reporting the income and expenses etc- how is that right?  Now you keep your records the same way I keep mine and file your taxes the same way I file mine- levels the playing field.  How is that a bad thing that we all follow the same rules?  Had everyone making money reported their earnings all along, maybe it wouldn't have come to this.  But they didn't, and instead of being happy with all of the years they got away with things, there is gnashing of teeth that the gravy train is going to come to an end.  Sorry, not one iota of pity from me- be happy with what you stole from the rest of us, and now it's time to get with the program.  And if you decide it's not in your nature to go legit and pay your fair share, then good riddance.  

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by: Snapped This user has validated their user name.

Mon Jan 24 11:45:43 2022

“ …for the average declutterer they have no clue and most importantly cannot PROVE it should they get audited by the IRS. …” - with attendant examples.

The few among many ‘underreporting’ until ‘now’ who knew better likely know what they need to in order to determine most of what can also be extrapolated by those examples.  And the more ‘innocent’ should be assisted, ‘judged’ less harshly perhaps, notwithstanding need to still comply.

There is the pesky ‘burden of proof’ issue, (yup, more shoeboxes on the horizon), but reasonability can prevail if the intent is genuine.  For example, if one can do a bit of ‘research’ to determine ‘market value’ at the time of acquisition - which may mean some digging when it comes to fluctuating valuations of antiques and collections - that, coupled with a consideration for inflation, can yield a reasonable deduction value that shouldn’t raise audit flags.  ‘Google’ - or your favorite browser - is the best invention of the millennium.  Well, most of it anyway.

As for any ‘inheritance’, either wills (to date and itemize), or again, good faith research showing market value at time of taking title, can then also be adjusted for inflation to derive fair value at sale time.  

Bear in mind though, eyebrow raising odds might rise if one tries to declare any ‘income’ losses after deductions. “Good faith” may not be enough.  But mostly, they’re looking for anomalies of reasonable boundaries  or matching data.  Especially as it applies to more ‘willful’ code violations.  The threshold ‘amount’ isn’t really the issue, because it isn’t really ‘new’ in the sense taxes were always based on ALL ‘income’ no matter how little.  

And if the statistically unlikely audit looms (right, 100% if it happens to ‘you’), consider the press they’ll get if they garnish your tips for $20 or so after you made a good faith “to the best of my knowledge” declaration - as long as you actually did of course.  Especially if some enterpriser reporting it thinks to ask them how much it’s costing them to do it under the circumstances.  After all, there does need to be some presumption of some ‘cost’ for ‘goods sold’ as well.  

And yeah, many are about to be burdened by more than just paperwork.  They’ll have to decide if their additional liability - if any, otherwise it’s all moot  - is worth that work collating and expensing ‘proof’, or if it’s just cheaper to open the purse a little wider.  That’s actually not an uncommon consideration for a lot of the tax code.  And also another reason it’s important to vote.  And maintain a secure right to do so.

As for the IRS, a data avalanche awaits.  If history holds, they’ll choke on it.

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by: BargainzBabylon This user has validated their user name.

Mon Jan 24 12:02:52 2022

Chicago 48 - ROFL - you still have to pay taxes on Mercari and Posh - eBay is NOT the one levying taxes :-D

I'm also a little surprised at a supposed CPA being unable to figure out the simple math to do taxes.  

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by: railady This user has validated their user name.

Mon Jan 24 12:13:08 2022

I found what appears to be a really superb explanation --

https://news.bloombergtax.com/tax-insights-and-commentary/new-
form-1099-reporting-coming-in-2022

@BargainBabylon
- You are absolutely correct - it's ONLINE payment processors - not only eBay but any others that collect payments for you. If I am not mistaken, if I make a PRIVATE SALE - one I initiate myself, and my customer pays via PayPal, that sale counts toward the $600 because PayPal is a payment processor and sends me a 1099K.  

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