Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
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The threshold for Form 1099-K remains at $20,000 with a 200 transaction limit for the year 2023. This delay designates 2023 as a transition period, maintaining the existing requirements for reporting.
Certain virtual transactions come with tax implications. Learn what those transactions are, and how they impact your taxes.
Businesses conduct a variety of transactions online regularly.
With the rise of internet utility and web-based solutions, businesses and people, in general, are more dependent on things online.
Be it to shop products, or to find niche services, online platforms are the new marketplaces.
The pandemic only added to this trend and enabled millions of consumers to find what they wanted online, from the comfort of their homes and offices.
Now, with the virtual marketplaces taking new shapes and forms, there are also consequential tax implications on the business that is earning through the online channels.
The payments ecosystem has shifted to the virtual world.
This led to an accelerated utility of peer-to-peer payment apps, which allow users to transfer funds instantly.
And if you’ve been in the loop long enough, you will know that these kinds of payments come with tax consequences. More specifically, these transactions are reportable because a third party (usually a third-party payment settlement entity) is involved in the transaction.
With the introduction of changes to Form 1099-K reporting requirements starting in 2022, the IRS is focusing on all third-party transactions (conducted within the course of business) and regulating the online peer-to-peer payments ecosystem.
If a merchant business receives more than $600 in settlement of a third-party payment transaction, then such a “payment” is considered income and must be reported on Form 1099-K.
But with the diverse functionalities of the virtual world, it can be a bit hard to pinpoint what does and doesn’t qualify as a third-party payment settlement transaction.
Just remember this: If you’ve received more than $600 via Venmo or PayPal from a business in exchange for a service or goods, then the amount is reported on Form 1099-K by the PSE (payment settlement entity). The “payment” you receive is treated as “income” for tax purposes.
The following discussion will provide the use case transactions in a variety of scenarios that qualify as third-party payment settlement transactions.
So, let’s get to it.
- Online Marketplace
- P2P Payments
- Sale of Goods Online
- Payments in Exchange for e-Services
- Social Media Influencers
- Crowdfunding
- Online Fundraising
Online Marketplace
Marketplace transactions which involve the sale of a variety of goods and services are subject to 1099-K reporting if the gross total of the reportable transactions exceeds $600.
Let’s assume that you sell coffee table books in bulk on eBay or Etsy. If a customer pays you $600 or more via Venmo or PayPal or any other peer-to-peer payments app, then the payments received are subject to taxes.
The third-party payment settlement entity (Venmo or other app-based entity in this context) is required to issue a Form 1099-K to you, summarizing the gross total of payments.
P2P Payments
All peer-to-peer payment transactions that involve payments beyond $600 are reportable per the new 1099-k reporting rules.
However, there are exceptions.
· Personal payments made to friends and family do not qualify for 1099-K reporting.
· Cash gifts received from friends and family do not qualify for 1099-K reporting.
It’s essential to remember that transactions that specifically deal with goods and services constitute 1099-K reporting requirements.
Sale Of Goods Online
If you sell goods online and receive $600 or more in gross total from your customer via payment apps, then such payments are treated as income, and the said income is subject to taxes.
However, if you re-sell products at a loss or sell personal items or gifts at a loss, then the sale proceeds are not subject to taxes.
For example, if you bought a limited edition coffee table for $800 but sold it on eBay for $650, then such an income is not subject to taxes because you sold the products for a loss.
Payments In Exchange For e-Services
Do you provide any of the following services or lookalike services?
- Online tutorials
- Online courses
- Online classes
- Webinars
- Live sessions
- Consultation services
- Copywriting
- Web design
- Graphic design
- Other IoT services
If you answered “yes”, then the income earned through such online services is also subject to taxes.
If the customer uses payment apps to pay for these services, and the gross total of the third-party transaction is $600 or more, then such an income is subject to taxes. The payment app needs to file a Form 1099-K and issue the same to the payee (merchant business).
Social Media Influencers
It’s no secret that even free rent or something equivalent to monetary value is also considered income by the IRS, and it’s subject to taxes.
Social media influencers receive products worth thousands of dollars for free to review and influence the buying habits of their followers.
This is technically income. And the social media influencer is more or less an independent contractor for the payer, making their income receipts taxable.
If the influencer is receiving payments in addition to products via third-party payment apps, then yes, such payments are reportable on Form 1099-K.
Otherwise, they’re reportable on Form 1099-NEC.
Crowdfunding
Income received through crowdfunding apps and platforms from a variety of sources is subject to taxes. If you’re a small business owner, and you’re running a small crowdfunding campaign to fund your business, then the funds received by your business is treated as income and it’s subject to taxes.
The payment apps are required to file a 1099-K with the IRS and issue the same to you.
Online Fundraising
Fundraising campaigns, on the other hand, are funds raised for a charitable cause. Donations for a charitable cause or medical expenses or disaster relief are not subject to 1099-K reporting. This is because the purpose of such a fund is for a non-profit cause.
If you’re paying your participating payees through a third-party payments app, then it’s absolutely essential that you keep a track of all those transactions and report them on Form 1099-K.
Consider using Tax1099, an IRS-authorized eFile provider, for your 1099-K reporting requirements.
Tax1099 Enables:
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- Bulk eFiling for 1099 and other IRS form series
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And so much more.
