Are you cleaning out your closet? Perhaps you are moving and have decided to sell some items you no longer need? If so, then this article is for you.
1099-Ks have been around since 2012 as a part of the Housing and Economic Recovery Act. This form is intended for individuals and businesses to report all their income for tax purposes. It requires credit card companies and third-party processors such as PayPal, Amazon, eBay, Square, Facebook Marketplace, etc. to report the payment transactions they process. Before January 2022, you received Form 1099-K if your gross payments exceeded $20,000 and if you had more than 200 transactions. This threshold captured sellers with businesses and excluded most people who were selling items they no longer needed.
For the tax year 2022, Congress reduced the reporting threshold for third-party processors to $600, even if you only received one transaction or if you had multiple transactions to add up to $600 or more. This means if you sell anything over the threshold of $600 through a third-party processor, you should receive a 1099-K by January 31, 2023.
The idea is to report the total income from 1099-K on your 1040 to avoid raising a red flag with the IRS. If you receive a 1099-K form, you will report your income on Schedule C as a sole proprietor. If you had processing fees, web hosting fees, etc., you could deduct them as a business expense on your Schedule C. As a good practice keep separate records of business and personal payments.
Paypal and Venmo transactions automatically default to Friends & Family unless the user chooses Goods & Services, it wont count towards the $600 threshold. The Cash App does not count if is a Personal or Business account. Zelle does not fall into these categories because is strictly bank to bank transactions.
Self-employment tax will be paid on only business income when receiving a 1099-K. Any personal payments for reimbursements (not for goods and services) will be reported on Schedule 1, Line 8z of Form 1040, and deductions in the same amount on Line 24z of Schedule 1. Hobby Income will be reported on Schedule 1 Line 8z.
The IRS has suggested waiting to file the returns until March to make sure taxpayers receive all the 1099-K forms.
If you have any additional questions or concerns regarding Form 1099-K, ADKF is here to help.