If you sold something online this Cyber Monday–or Black Friday or Small Business Saturday–you might get a tax notification.
Online marketplaces and third-party payment platforms such as eBay, Etsy, Venmo, and Paypal are now required to send Form 1099-K to people who sell goods or conduct services on their platforms. This is an income reporting form that tax filers send to the IRS which could leave some people with tax bills next year.
Due to tax reporting changes enacted by Congress in 2021, the 2022 tax year is set to be a major headache. Here’s what you need to know.
Last week, the IRS warned all taxpayers of a new reporting requirement that will affect the 2022 tax filing year. For any transactions on third-party networks above the $600 threshold, tax filers will receive Form 1099-K to report that income.
As the IRS website explained:
As taxpayers gather tax records, they should remember that most income is taxable. This includes unemployment income, refund interest, and income from the gig economy and digital assets.
Taxpayers should report the income they earned, including from part-time work, side jobs or the sale of goods. The American Rescue Plan Act of 2021 lowered the reporting threshold for third-party networks that process payments for those doing business. Prior to 2022, Form 1099-K was issued for third-party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single transaction exceeding $600 can trigger a 1099-K. The lower information reporting threshold and the summary of income on Form 1099-K enables taxpayers to more easily track the amounts received. Remember, money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Those who receive a 1099-K reflecting income they didn’t earn should call the issuer. The IRS cannot correct it.
Who is affected by this change?
Many tax filers who have never received the reporting Form 1099-K may get one next year for the 2022 tax year for engaging in activities such as selling second-hand items, engaging in gig work, and even sending a friend money to reimburse her for dinner.
For example, if you sold old exercise equipment from your garage, shoes or purses you’re no longer wearing, or clothes that your kids have outgrown, be prepared. You may have already noticed that the third-party website asked you to confirm your social security number or address. This is the reason.
If you’re a babysitter or tutor and you are paid via a third-party network such as Venmo, you may receive a Form 1099-K.
Even if you just split dinner with a friend and paid them for your portion or sent a relative a gift, the tax reporting requirement could be triggered. The IRS says this should not be a taxable occurrence, but mistakes happen.
As the Coalition for 1099-K Fairness finds, women will significantly be affected as they tend to be casual sellers and are heavily involved in the gig economy. Many young women and stay-at-home moms earn a small amount of income on the side and will face these new reporting requirements regardless of whether they earn enough to even be taxed on it.
The outcome of this new reporting requirement could be a chilling effect on second-hand sales. In surveys, most casual sellers say they don’t earn that much and would be discouraged from selling online in the future. While some of them depend on the income generated–not surprising given inflation–many are motivated to give pre-loved goods a new home.
Why the change?
The surge in Form 1099-Ks is due to changes that Democrats in Congress passed last year as part of the American Rescue Plan to fund President Biden’s stimulus plan. The left sought to raise funds for their spending agenda by recouping lost revenue from individuals just trying to make ends meet or sustainably deal with unwanted clothing and furniture.
Prior to this change, the Form 1099-K reporting threshold was for taxpayers with more than 200 transactions worth an aggregate above $20,000.
Independent congressional researchers are already predicting that this change will cause errors and problems during next year’s tax filing season. The IRS will have to expend more resources addressing incorrect returns. If IRS customer service is already so woeful that it only answered 11% of phone calls during the 2021 tax season, imagine what will happen during the upcoming tax filing season.
Read more here: Takeaways: Form 1099-K Tax Reporting Rules
Congress made a mistake in lowering the threshold. Taxpayers will soon find out about their error, but likely not before it creates a massive tax filing headache. There’s still time for Congress to fix it though. Let’s hope they do.