Selling goods or services online? Be prepared for increased scrutiny from the Internal Revenue Service (IRS) this tax season. New regulations mean more online sellers will receive 1099-K forms, impacting how they report income.
Shifting Tax Rules for Online Platforms
Previously, online platforms like StubHub, Etsy, and eBay only issued 1099-K forms to users earning over $20,000. However, since January 1, 2024, payment platforms such as PayPal, Square, and Venmo must report payments of $5,000 or more annually, regardless of the number of transactions. This threshold is slated to decrease further, reaching $2,500 in 2025 and $600 in 2026, unless the IRS alters its plans.
The IRS is intensifying its efforts to ensure accurate income reporting, particularly for those with online businesses. The lowered threshold signifies that millions more taxpayers will receive these forms, prompting them to properly account for their online earnings.
Impact on Online Ticket Resellers and Other Sellers
This change, initially slated for 2021, was delayed due to concerns raised by online platforms regarding increased record-keeping and potential confusion. The phased approach adopted by the IRS aims to mitigate these issues. Even before these changes, taxpayers were obligated to report all income, but many failed to do so, especially in the absence of formal reporting documents. This new enforcement aims to close that gap.
IRS Enforcement and Potential Targets
The IRS is actively pursuing those who neglect to report online income, with potential penalties for non-compliance. Recent investigations, including one into experts on the JustAnswer platform, highlight the agency's focus. The investigation seeks information on individuals who earned $5,000 or more on the platform between 2017 and 2020, a period when 1099 forms were reportedly not issued. One taxpayer audited in 2020 had over $400,000 in unreported income from the platform, emphasizing the potential scale of unreported earnings.
Distinguishing Between Hobby and Business
Regardless of receiving a 1099-K, generating revenue online, even as little as $2,500, should be treated as a business. Establishing a separate legal entity (LLC), filing a Schedule C, maintaining a dedicated credit card and bank account are recommended. This separation clarifies financial activities and distinguishes between personal and business finances. The IRS may classify an activity as a hobby if it consistently reports net losses (three out of five years) or doesn't meet other IRS criteria. This classification can lead to disallowance of business deductions.
Staying Informed about Tax Law Changes
Ignorance of tax law changes is not a valid defense during an audit. Understanding these regulations is crucial for anyone generating income online. Being prepared and having your financial records organized is essential for navigating potential audits effectively.
