2024 is over. We are in the new year, and soon we will be in the tax season, figuring out the tax obligations for the previous year. It is definitely not the fun part of the year, but still important. IRS has been changing the tax rules and reporting rules over the years. So, it is also important to keep up with the changes. Usually tax preparation services and tax professionals would help and they would be updated on the latest changes. It is always good to consult tax professionals as everybody's tax situations would differ. In this blog post I would like to discuss the the changes for 1099-K reporting for third-party payments platforms and apps. When it was originally introduced years ago, the threshold for reporting was $20,000 in gross payments and at least 200 transactions. This was mainly focused on e-commerce activities and intended to make sure those who engaged in e-commerce were paying their taxes. Now the threshold for 1099-K is changing and will be lower for 2024, and even lower for 2025 and 2026 tax years.
There was a time, in the early days of e-commerce when sales taxes were not withhold and were not a requirement. Then slowly things started changing. It took some time but governments did catch up with making sure they are getting their sales tax money. Initially it wasn't clear how to achieve this, since online space was something new and identifying jurisdictions for taxes was a new challenge. This was another instance of how governments are slow to adapt to changes and don't always foresee the upcoming changing on how we do things in the near future. There were even doubters in so called experts that online commerce would outgrow the brick and mortars. It didn't take long for sales in online spaces to grow in massive rates, and today online purchases and transactions are the norm. If you are running business and don't utilize some sort of internet based tools or platforms, you may find yourself in disadvantage. Today, almost all e-commerce platforms utilize all the tax obligations for the various jurisdictions and everything seems to be fine.
In addition to sales taxes, there are also income taxes that IRS wants to makes sure are reported and paid. With the advancements in e-commerce and online transactions, there were opportunities created for new small businesses, sole proprietors, crafters, hustlers, and peer to peer transactions. A little over ten years ago 1099-K reporting was introduced and became a requirement for online platforms and payment processors to report on individuals and businesses who met the threshold within a tax year. The threshold was 20,000 gross payments and at least 200 transactions. This has been the threshold for a very long time until recently when IRS announced changes and lowering the threshold. What 1099-K meant was if individuals and businesses were engaged in online activities that involved payments for goods and services, these platform were required by law to report these numbers to IRS and entities involved.
Now the IRS income tax rules, in general, have not changed. Income tax has been the same, you make income regardless the amount, you pay taxes. It has been up-to the individuals to figure out their income and report accurately. With new opportunities and environment how income is generated, it may have been confusing and also filing tax returns have never been simple. The simplest part of filing tax return forms is probably when the only income is a regular work somewhere that provides W-2s. You plug in the numbers and done. New types of activities that generate income may not be as clear, if those involved are only added small amounts of income and not necessarily running businesses. It may be easy to not include such income or misclassify them. Regardless, IRS wants its moneyz and if there is income it must be paid. So when 1099-K is reported, and this income did not show up in IRS systems, they would after some time send payment request with interest to those who may appear as not have paid yet.
A friend of mine who was involved in e-commerce one year received such a letter. He was asked to pay almost $10,000 dollars in taxes and interest. This happened all because of misclassifying the income. When IRS receives 1099-K, they require the individuals to pay taxes on the full amount, without any considerations to costs. Most of the time in e-commerce because of all the costs and fees involved the gross payments is never the accurate income. While it may vary, most like 10-30% of this gross amount would be the actual profits or income. Since it wasn't reported properly, for IRS the entire amount is an income. Those who receive such letters find themselves in difficult situations. Fortunately, my friend did report the income but under a different category, not as a business income. By updating the forms for that tax year, not only they were able to avoid the $10,000 additional tax and interest payments, but ended up receiving an a tax return. This may not be the case for everybody, and everybody's tax situations are different. Important thing is to make sure we consider all income when doing our taxes. In some situations it may be wise to hire a tax expert, to avoid future headaches.
IRS announced that the threshold changes would start in 2023. But this was delayed and the original threshold was in place until the new changes were introduced. For 2024 tax year the new threshold is $5,000, for 2025 it will be lowered to $2,500, and then in 2026 lowered again to $600. After 2026, I believe it will just stay at $600. That is already very low.
This threshold is not only for e-commerce activities. While the original 1099-K targeted e-commerce activities and platforms. The new requirements are for all payments platforms and apps. It may be Amazon, E-bay, Etsy, and also Venmo, Cash App, etc. So, if you receive $5,000 in 2024 tax year, it is reported to IRS. What portions of this amount is an income, is up-to the individuals to figure out and report is properly in filing tax reports. At least that is my understanding, and I am not a tax professional at all.
Remember when there is a loss in these transactions, for example, if we sell personal items at a loss, that is not an income. If there is not income, there are no taxes. However, this still needs to be properly reported with offsetting adjustment, so that there are no unexpected tax obligations.
There are also certain things that should not be reported. According the IRS reporting is not required for personal transactions such a birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on form 1099-K.
