Updated: Delayed to 2023 - PayPal, Venmo issuing 1099-Ks

[cathy63]

...DW does sell some crafts, not to make money but to have a way for her to move along finished goods. The cost of materials, craft show fees, donated gifts to the craft show and such are likely 70-80% of her total sales. How can she/we reduce the effect of a 1099-K from "the Square" she might receive if it is a Hobby?

I agree with Disneysteve. This is a business and should be taxed as one. If you track expenses diligently, you'll probably find that there's not as much profit as you think. If she's traveling to craft shows to sell her wares, or to exhibits or conferences put on by others, then you can deduct mileage, hotels, meals, etc. If she buys stands, tablecloths or signage for her booth, that's a business expense. You can also use the self-employed health insurance deduction if either of you is on ACA or Medicare.

 

[CRLLS]

As much as you want to call it a business, it isn't according to the IRS site. To be clear, she is basically trying to recover her costs, not make a profit. That 80% costs do not include her time spent making the items. I'll answer the IRS differentiation between a business and hobby below in Red

Key questions to consider
Is the activity conducted like a business? No
Does the taxpayer maintain complete and accurate books and records? No
Does the taxpayer do the activity in the same way as similar profitable activities? No
Does the taxpayer change their methods of operation to improve profitability? No
Does the taxpayer advertise or promote the activity? No
Does the taxpayer work to secure suppliers or products necessary for the activity? No
What is the taxpayer or their advisors' expertise in the activity? A lifetime of sewing for pleasure
Has the taxpayer, or their advisors, prepared for the activity by extensive study of its accepted business, economic, and scientific practices? no advisors and no personal study
Does the taxpayer follow the accepted business practices or advice of experts when
they pursue the activity? No
Is the activity a main source of income for the taxpayer? No
Does the taxpayer spend much of their personal time and effort on the activity, particularly if the activity does not have personal or recreational aspects? Yes but the time is purely recreational
Has the taxpayer pursued the activity full-time or part-time? No -
retired
Does the taxpayer employ competent and qualified persons to perform the activity?
No employees
Has the taxpayer made or expect to make a profit? No
Has the taxpayer engaged in similar activities in the past and converted them from unprofitable to profitable enterprises? No
Does the taxpayer intend to profit from appreciation in the value of assets, such as land, used in the activity? No assets. All equipment is here personal property
Is the activity profitable in some years? Likely not
Does the taxpayer occasionally have a small profit from the activities that is offset by
large investments they have made or suffering large losses? Sometimes she sells less than she buys in supplies.
Has the taxpayer made substantial profit from the activity? Nothing "substantial"
Could the activity earn a substantial ultimate profit in a highly speculative venture? Likely not
Do any losses from the activity fall beyond the taxpayer's control or are they normal in the startup phase of their type of business?
Do the taxpayer's losses continue beyond the period which would be necessary to bring their activity into profitable status? again. not trying to be profitable

Are the taxpayer's losses because of things beyond their control, like drought, disease, fire, theft, weather damages or depressed market conditions? what losses?
Has the taxpayer had a series of years in which they made a profit? yes
Does the activity have elements of personal pleasure or recreation? Very much yes
Does the taxpayer have personal motives for doing an activity, especially where there are recreational or personal elements involved? Yes
Does the activity lack appeal other than profit? No
Claiming profits and losses

If taxpayers aren't trying to make a profit with their hobby, business or investment activity, they can't use a loss from the activity to offset other income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts and S corporations. It doesn't apply to corporations other than S corporations.

If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1 (Form 1040)PDF, line 8.

 

[disneysteve]

As much as you want to call it a business, it isn't according to the IRS site. To be clear, she is basically trying to recover her costs, not make a profit.

Has she done this in previous years? If so, how did you report that income in the past? Or did you just pretend it didn’t exist?

You asked how she can lessen the impact of the 1099. There are really only 2 choices. You can pay the taxes due on the full amount or you can simply file a schedule C and deduct all relevant expenses. IMO it makes a lot more sense to take every deduction she is entitled to. Why pay more taxes than you need to?

 

[Montecfo]

Your audit exposure arises more in the case of a business generating losses (and thereby tax benefits) for a number of years. IRS might determine that is not a business and disallow those losses.

But if you are operating (not passive investment) and making money, that is best considered a business and that is unlikely to be argued.

Why "lead with your chin" by foregoing valid deductions?

 

[disneysteve]

But if you are operating (not passive investment) and making money, that is best considered a business and that is unlikely to be argued.

So many people don’t understand this, which is exactly why the 1099 rule was changed. They’ve all been earning income for years and not reporting it. “I don’t have a business. I just sell things and make money.” The eBay groups are filled with those folks. Been selling on eBay for years but never reporting their income. Now they’re all annoyed because they have to start.

 

[Errollyn]

I may be the only person on earth who's kinda happy to hear this. I have a side gig and collect a lot of my payments through PayPal and Venmo (though a majority is still in cash). Every year I present my P/L ledger to my tax accountant so I can pay taxes on it, but she always tells me it's just a hobby and doesn't need to be reported. Her logic is that--if you look at the 10+ years I've had this "hobby"--I've lost money overall. Which is true, and it's why I haven't pressed the issue. But for the last few years I've earned more than I've spent, so I would prefer to pay the taxes to keep my conscience clear. This year, if PayPal and Venmo send 1099s, it'll be easier to convince my accountant to file the taxes.

 

[disneysteve]

I may be the only person on earth who's kinda happy to hear this. I have a side gig and collect a lot of my payments through PayPal and Venmo (though a majority is still in cash). Every year I present my P/L ledger to my tax accountant so I can pay taxes on it, but she always tells me it's just a hobby and doesn't need to be reported. Her logic is that--if you look at the 10+ years I've had this "hobby"--I've lost money overall. Which is true, and it's why I haven't pressed the issue. But for the last few years I've earned more than I've spent, so I would prefer to pay the taxes to keep my conscience clear. This year, if PayPal and Venmo send 1099s, it'll be easier to convince my accountant to file the taxes.

I'm a little concerned about an accountant telling clients they don't have to report their income.

You certainly shouldn't have to convince her of anything if you get a 1099. At that point, the income has already been reported to the IRS and your/her job is to make sure it matches up with your return. If she still says to ignore it, I'd find a new accountant.

 

[cathy63]

As much as you want to call it a business, it isn't according to the IRS site. To be clear, she is basically trying to recover her costs, not make a profit. That 80% costs do not include her time spent making the items. I'll answer the IRS differentiation between a business and hobby below in Red

You'll have to make your own decision on this, but from what you said, I'd put several of your "No" answers as "Yes". Enjoying something as recreation doesn't mean it can't evolve into a business, even if that's not what she planned when she started accepting payment. (Which is also how my DD ended up with a side business as a line dancing teacher.)

If your wife is deliberately creating inventory and selling it at a craft fair, then that is conducting an activity like a business, advertising or promoting the business, securing supplies for the business, etc. The fact that this is time she would spend even if she weren't getting any money for it just means she's one of the super lucky ones who has found a way to make money from something she loves.

Even if you decide to report it as hobby income for 2022, I would encourage you to help her keep business records for 2023 and see what her actual profit or loss is so you can make a more informed decision next year.

Whether it ends up as a business or as a hobby, it isn't new income though and it was always supposed to be taxable. The reporting change didn't create a new tax, it just made it harder to evade the old tax.

 

[CRLLS]

Has she done this in previous years? If so, how did you report that income in the past? Or did you just pretend it didn’t exist?

You asked how she can lessen the impact of the 1099. There are really only 2 choices. You can pay the taxes due on the full amount or you can simply file a schedule C and deduct all relevant expenses. IMO it makes a lot more sense to take every deduction she is entitled to. Why pay more taxes than you need to?

She has sold items on and off, only at 1 annual craft fair, Covid years excluded. This is her first year selling for about 4years now. And no, income has not been reported in the past. In order to make it a business, there must be records of costs and sales etc. That effort has not been made.

To restate the situation. She makes things for her enjoyment not to sell for the purpose of making a profit. All of her items are one-of-a-kind. Her hands are busy while watching TV and many days, she spends in her hobby room working on various projects. Many of her items go directly to friends or become home decor in our own home. Items get made primarily for the challenge and the enjoyment. Unfortunately, once done, things not given as gifts or hung on our wall, simply get put away into storage. That gets to become overwhelming. The selling part is simply to minimize the clutter. Calling it a "business" cannot be justified IMO.

Right or wrong, up until now we have been considering her sales similar to that of a garage sale. The items were made for personal use/gratification. When she does go to sell, I would guess that her gross sales minus actual cost might be a couple of hundred dollars per year. As such, we did not report it. I feel comfortable doing so. If "the Square" reports her gross sales on a 1099-K this year, then it will become messy. I guess I'll just wait and see if we get a 1099-K.

P.S. It looks like her "The Square" sales were just a bit over 400 so no 1099-K should be issued.

 

[gauss]

^ If she has no profit motive, then the IRS would not consider it a business.

Some of the main IRS tests for a business vs a hobby are
- profit motive
- doing it regularly

With the increased Standard Deduction in 2018 - 2025, the miscellaneous deductions subject to 2% AGI floor on schedule A have been suspended. This is where nonbusiness hobby expenses could historically be deducted.

As such you can view her expenses incurred as part of the increased standard deduction -- assuming that you take it

Once 2026 rolls around and if the law does not change and if you itemize, then you can deduct hobby expenses on schedule A (subject to 2% AGI floor).

-gauss

 

[JoeWras]

Merry Christmas from the IRS

No, really. Not being sarcastic.

IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K


https://www.irs.gov/newsroom/irs-an...or-third-party-payment-platforms-forms-1099-k

IR-2022-226, December 23, 2022
WASHINGTON — The Internal Revenue Service today announced a delay in reporting thresholds for third-party settlement organizations set to take effect for the upcoming tax filing season.
As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021.
As part of this, the IRS released guidance today outlining that calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) that would have generated Form 1099-Ks for taxpayers.
"The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan," said Acting IRS Commissioner Doug O'Donnell. "To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements."

 

[SecondCor521]

No, really. Not being sarcastic.

IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K


https://www.irs.gov/newsroom/irs-an...or-third-party-payment-platforms-forms-1099-k

I doubt the "reduce confusion" part.

Thanks for posting the announcement.

 

[JoeWras]

I doubt the "reduce confusion" part.

Thanks for posting the announcement.

Well they aren't wrong: it will reduce the IRS's confusion.

Seriously, if you read between the lines in their IRS announcement, you get the feeling that this is going to cause massive calls to the IRS (which already can't take your call), it is going to cause massive letters from the IRS for corrections and penalties, and so on.

I would expect the IRS will clarify their publications with better examples that Paypal, Venmo, EBAY, etc. can point their users to in the upcoming year.

Additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry. For taxpayers who may have already received a 1099-K as a result of the statutory changes, the IRS is working rapidly to provide instructions and clarity so that taxpayers understand what to do.

It also shows the power the IRS has to essentially defer a law, presumably because it is going to put a burden on the agency too.

 

[FLSUnFIRE]

Well they aren't wrong: it will reduce the IRS's confusion.

Seriously, if you read between the lines in their IRS announcement, you get the feeling that this is going to cause massive calls to the IRS (which already can't take your call), it is going to cause massive letters from the IRS for corrections and penalties, and so on.

I would expect the IRS will clarify their publications with better examples that Paypal, Venmo, EBAY, etc. can point their users to in the upcoming year.


It also shows the power the IRS has to essentially defer a law, presumably because it is going to put a burden on the agency too.

Methinks it will also give the admin time to hopefully avoid political fall out/possibly revise the law to what most would consider a more reasonable threshold which would relieve the burden on both ends. There will be a lot of people caught off-guard by this that are far from rich and even further from considering themselves "rich." Nevermind the confusion if personal reimbursements (of which I sure there are billions) all the sudden get a 1099k since the service doesn't know how the payment should be reported. The trick is to milk us without it being too obvious... hence tax withholding by employers. Rich/poor/left/right, no one wants a letter from the IRS!

 

[disneysteve]

IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K

Another year that millions of people get to evade taxes. Seriously, this law was passed in March 2021 so everyone involved has had 21 months to prepare and they're still not ready? I haven't been on Facebook much today but I'm sure lots of people in my ebay groups will be thrilled about this. They've never reported their income or paid taxes before (and freely admit that fact). Now they get another year to cheat before they'll finally have to go legit.

 

[JoeWras]

I'm with you Steve. I don't do eBay or Venmo so no impact to me.

But I do feel for the person who inherits some furniture and jewelry, sells it on eBay and then gets this with no clue what to do. No clue on establishing basis, etc. This will hit a lot of unsophisticated people hard.

Then there's the Venmo thing where people pay for shared meals, and so on.

There's a lot of guidance needed.

In another thread I've shared that I get compensated for reviews with "free" products from big box hardware. I list that as income, but I wonder how many people do. Amazon now files that with the IRS probably because they are highly visible. Apparently a lot of reviewers quit once the reporting started.

 

[disneysteve]

I'm with you Steve. I don't do eBay or Venmo so no impact to me.

I sell on ebay regularly and have since 1997, but I report my income and pay my taxes like everyone is supposed to.

But I do feel for the person who inherits some furniture and jewelry, sells it on eBay and then gets this with no clue what to do. No clue on establishing basis, etc. This will hit a lot of unsophisticated people hard.

Then there's the Venmo thing where people pay for shared meals, and so on.

There's a lot of guidance needed.

I understand that to some extent. Since COVID arrived, I've been doing my mom's grocery shopping, picking up her prescriptions, etc. She has electronically reimbursed me thousands of dollars. If I got a 1099 for those transactions, I'd be just fine because I keep a log so I know how much she owes me, but I'm sure plenty of people don't keep those sorts of records.

 

[CRLLS]

I sell on ebay regularly and have since 1997, but I report my income and pay my taxes like everyone is supposed to.



I understand that to some extent. Since COVID arrived, I've been doing my mom's grocery shopping, picking up her prescriptions, etc. She has electronically reimbursed me thousands of dollars. If I got a 1099 for those transactions, I'd be just fine because I keep a log so I know how much she owes me, but I'm sure plenty of people don't keep those sorts of records.

As I understand it, only a business, either a person or entity, filing a Schedule C can deduct their costs of goods sold. As an individual, where is it that a 1099 can be "adjusted?

 

[disneysteve]

As I understand it, only a business, either a person or entity, filing a Schedule C can deduct their costs of goods sold. As an individual, where is it that a 1099 can be "adjusted?

I’m not a tax pro so I don’t know the answer. Maybe one of our resident CPAs can answer this?

 

[SecondCor521]

As I understand it, only a business, either a person or entity, filing a Schedule C can deduct their costs of goods sold. As an individual, where is it that a 1099 can be "adjusted?

Neither a tax pro nor CPA, but I am a AARP Tax Aide volunteer tax preparer.

If you look at the 1099-K form on the IRS website, it seems to imply that those payments are only supposed to be issued to businesses or gig workers. Gig workers can be folks like Uber drivers or people reselling stuff for a profit (see https://www.irs.gov/businesses/gig-economy-tax-center). Gig workers might not realize it, but frequently they are in business and should be filing a Schedule C for their business activities. Business expenses would be subtracted on the Schedule C.

There was some talk when discussing this issue that payment processors should not be including amounts on a 1099-K that were "friends and family" transactions. I know Paypal, at least, distinguishes between F&F transactions and business transactions. F&F transactions charge no fee and provide no protections; business transactions have a fee and provide some sort of protection. I have heard that Zelle and Venmo might have similar structures. So there is hope, at least, that "reimbursements" might completely escape this morass.

If one gets a 1099-K for "reimbursements", I have not seen how properly to report and adjust for such. I know that some of my fellow Tax Aide folks would put it on Schedule 1 line 8 as other income and then enter a "negative other income adjustment" for any costs also on Schedule 1 line 8, reporting only the net income that way. I think that the IRS would not see the detail so I'm not sure that's the best way, but it is perhaps a way.

I suppose the third category that a 1099-K payment might fall into is hobby income. I don't know much about hobby income, but I think it is supposed to be reported on Schedule 1 Line 8 somewhere. I don't think hobby-related expenses are currently deductible. If true, and if people get 1099-Ks for hobby income, there will be economic pressure to avoid this situation going forward as most people are not going to want to do hobbies if their costs are not deductible.

If one gets a 1099-K for selling an item (like a car or a gun safe), personally I think that should be reported on a Schedule D. The cost of the item can be provided as the basis, the 1099-K amount as the proceeds. If a gain, then capital gains taxes would be due; if a loss, the taxpayer should use the adjustment code of "L" to zero out the loss because one cannot take capital losses on personal items.

I'd be interested in @cathy63's take on all this.

 

[SecondAttempt]

Another year that millions of people get to evade taxes. Seriously, this law was passed in March 2021 so everyone involved has had 21 months to prepare and they're still not ready? I haven't been on Facebook much today but I'm sure lots of people in my ebay groups will be thrilled about this. They've never reported their income or paid taxes before (and freely admit that fact). Now they get another year to cheat before they'll finally have to go legit.

I have a little bit different take Steve, although I do not disagree with you about having to compete with ebay cheats.

My take is that my partner and I choose not to combine finances and instead reconcile each month. This is largely to take advantage of credit card or other benefits. This month she paid me about $1200 for reimbursement for airline ticket and cell plan. People have been doing stuff like this forever and it would turn into a nightmare for everyone if the IRS used 1099s and pursued enforcement actions they would ultimately lose. In my case, for example they could ultimately pursue me but would lose because what we are doing is perfectly legal.

I had a vaction rental for almost 10 years that I operated professionally as a business including paying taxes and 1099-ing various people like cleaners and other professionals. It angered me that most of my competitors did not pay their fair share of state taxes and got better rates from cleaners because they did not 1099.

But my understanding is that this approach is a blunt instrument that will create a lot of extra work for a lot of innocent citizens but will result in very little collected extra income tax revenue.

In my case I believe I am already compliant but this will create a huge hassle if I have to explain and document how we reconcile cell phone bills every month.

 

[Montecfo]

As I understand it, only a business, either a person or entity, filing a Schedule C can deduct their costs of goods sold. As an individual, where is it that a 1099 can be "adjusted?

Sure it can be adjusted. You are only taxed on gains.

Just because you were issued a 1099 does not mean you have taxable income. It just means a payment was reported. Characterizing that payment accurately and paying the resulting tax, if any, is the taxpayer's job.

 

[SecondAttempt]

Well, we're supposed to pay taxes on any qualifying income...I don't see this as a problem, as long as people know that money sent to them might be classified incorrectly and are prepared to contact the 1099-K issuer to correct it.

Are you serious? If I go to a bar with a buddy now and we settle up in cash it is perfectly legal and the IRS is none the wiser. But if we settle up by Zelle or similar method and are 1099-ed, we now have an obligation to prove our payment was a simple reimbursement. Do we do this by paying a notary to notarize a reimbursement agreement or do we pay a lawyer to defend us during the audit? Why would the 1099 issuer correct anything. It is a risk for them with no benefit.

This is an idiotic rule with serious consequences.

The real economy does not work the way politicians think it does. They are out of touch.

 

[JoeWras]

The previous discussion is exactly why the IRS needs to come up with guidance and plenty of examples in their publications. Right now, we're all just guessing, but they are good guesses.

And if you look around on the internet, everyone has a different opinion. We're all confused and the IRS needs to clarify.

 

[Surewhitey]

I'm a small business owner who uses Venmo and Zelle for both payments and reimbursement, usually for vacation rental sharing and grocery reimbursement.

This year is a "test" year. If it becomes a headache, I'll adjust the way I get reimbursement for non-biz things and maybe even business. Seems like a headache for honest people to catch a few people...

Seems Zelle is a way to circumvent the 1099-k issue. They'll close that hole eventually, likely.