PayPal/Venmo Goods & Services IRS Report Threshold $600 Gross in 2023?

[frinesi2]

I'm not sure if there's been a discussion on this forum regarding new rules for online payments and how they're reported to the IRS in tax year 2023.

Disclaimer - leave the politics out because right now it's a reality that us makers/sellers will have to deal with and that's that. It does not matter who drafted, voted on, and signed in this law.

Here's a skimmed summary, from PayPal's guidance on the matter (with added emphasis for key points):


All US payment processors, including PayPal, are required to provide information to the US Internal Revenue Service (IRS) about customers who receive payments for the sale of goods and services above the reporting threshold in a calendar year.

Beginning January 1, 2023, the Internal Revenue Service (IRS) implemented new reporting requirements for payments received for goods and services, which will lower the reporting threshold to $600 USD for the 2023 tax season.

This new Threshold Change is only for payments received for goods and services transactions, so this doesn’t include things like paying your family or friends back using PayPal.

PayPal is required to report payments that are identified by the sender as being for goods and services to the IRS, even if it was a mistake. This requirement applies once you receive $600 USD or more from this type of payment.

... payment service providers, like PayPal and Venmo, are required by the IRS to send customers a Form-1099K if they meet the $600 USD threshold amount ... PayPal is required to report the total gross amount of payments received for goods and services which can include:

Amounts from selling personal items at a loss
Refunded amounts
Processing fees

PayPal and Venmo will ask customers to provide tax information like an Employer Identification Number (EIN), Individual Tax ID Number (ITIN), or Social Security Number (SSN), if they haven’t already, as they approach the reporting threshold, so they may continue using their account to accept payments for the sale of goods and services without any issues.

If your TIN fails verification, you'll need to fill out an equivalent tax form W-9.


Here's the bottom line - If you are a seller and you receive more than a cumulative $600 in payments marked Goods & Services in 2023, you and the IRS will receive a 1099-K from PayPal and you will be expected to pay income tax on that money.

Depending on how much revenue you make in a year and when you receive that money during the year, you may also meet the threshold for needing to pay quarterly taxes.

As a buyer - do not be surprised if a lot of small forum, Etsy, eBay, etc. vendors raise their prices by 25% or if they quit selling altogether. This is definitely going to be a burden on people who are just trying to keep their hobby sustainable.

If anybody has any additional insight in to these changes, or any writeups explaining how this will impact hobbyists, I'd love to discuss.

[frinesi2]

And now for Part II - More Confusion!?

It appears that the IRS has delayed this until 2024

NTA Blog: Heard Loud and Clear: IRS Postpones Implementation of $600 Form 1099-K Reporting by a Year - TAS

However I don't see that explicitly stated on their website:

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

Notice 2023-10 (irs.gov)

Although it's possible by claiming that 2023 is now a transition year, and 2022 is no longer a transition year, that online payment platforms are required to generate a 1099-K triggered by the lower threshold, but are only required to report it the higher threshold of $20,000 in payments and a minimum of 200 transactions is reached for 2023.

[dhotop]

This should clear up any confusion,LOL: Understanding Your Form 1099-K | Internal Revenue Service (irs.gov)

Seriously, what this will require is keeping good business records, which anyone selling goods/services for profit should already be doing anyways. You don't pay taxes on the gross receipts reported on the 1099-k, but the 1099-k will need to match your self-reported gross receipts, from there, you deduct your goods/services costs to find your gross profit and then deduct allowable business expenses from that to find your net, taxable income. Depending on how you have your business structured (LLC, sole-proprietor, corp, etc) will determine which forms you use (or filing a seperate business return altogether) but most likely you are going to be reporting all this on a schedule C as part of your personal tax return. If you have an actual business entity set up, its a different can of worms of how it gets reported, passed through to you and then reported again by you on your personal return.

For anyone who sells goods/services, and uses a 3rd party payment processor, the only thing that's changed is the threshold of what that 3rd party reports to the IRS, via the 1099-k. It doesn't matter if its a hobby, if you do something that makes a profit, you owe taxes on it.

Its part of the philosophy of: "if it moves, tax it. If it doesn't move, subsidize it" Sorry, it was killing me not to get a little into the politics of this...

As a disclaimer, I'm not a CPA but have studied all of this and have been doing my own taxes for years in which I've dealt with the scenarios described above, so have some relevant experience with it all.

Personally, I also think there's a good chance this will go away this year through congressional negotiations over debt limits, budgets, etc.

[frinesi2]

This should clear up any confusion,LOL

Just to be clear, the only thing I was confused about was what year it was becoming mandatory for the online payment services to report at this new, much lower threshold. In general I just wanted to let the forum members know about these goings on since it's already causing consternation with transactions on other forums I'm a member of.

I'm aware of the letter of the law and I'm aware that if I was a perfect boyscout, I would follow it to the letter, but let's not pretend that the reality is that for a lot of folks like me, this IS a hobby, and it is NOT what keeps our lights on or puts food on the table, and, well, it's going to be a pain in the ass if we have to go through the motions of filing all this extra tax paperwork for this hobby (not to mention situations where somebody is just straight up selling an a few surplus bike parts, for example, and the buyer pays for it as Goods and Services - guess what, the seller now has to go through this process if they get more than $600 total).

I keep pretty detailed records and I've worked 1099 jobs in the past that were very much not hobbies so I have some familiarity with the process - what I'm annoyed with here is possibly having to go through all of that rigmarole over such a relatively small amount of money. It would take me at least a decade to hit the existing threshold.

I do hope you're right about this blowing over. It seems silly to set the threshold so low.

[dhotop]

Sorry, if I came across wrong. My first statement was tongue in cheek, IRS documents never clear anything up.

The rest of it was me just trying to be informative, not suggesting that you or anyone else isn't a good boyscout, nor am I saying I always am... This stuff is really complex, confusing and tedious for a legitimate business interest. It really sucks if it starts applying to hobby "income" because it ends up discouraging people from doing good things with their time, skills and knowledge. I have several hobbies, where I basically try to let them pay for themselves, definitely not padding the retirement account with them. But if they suddenly turn into paperwork nightmares, that will change things quickly for me.

I will double-check, but my understanding is the IRS was going to originally roll this out for tax year 2022, so the 1099-k's would arrive in 2023 but have since pushed that out a year. There is at least one delegation in congress already talking about this and I think I heard there was even some bi-partisan support to kill it. There's something about this for all political persuasions to dislike, so keep your fingers crossed.

[dhotop]

Delayed one year: IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K | Internal Revenue Service

[Tripleman]

Lots of small service and parts suppliers in UK have given up with PayPal due to excessive charges.Any parts I sell Laverda or Honda are paid for by bank transfer.

[dhotop]

Lots of small service and parts suppliers in UK have given up with PayPal due to excessive charges.Any parts I sell Laverda or Honda are paid for by bank transfer.

Hmm, I wonder if the banks would then be required to report it.

I would imagine Paypal, EBay, etc are lobbying hard to get rid of this. It will be detrimental to their business as the hobbyists sellers either quite or go underground with cash-only transactions.

[Tripleman]

Hmm, I wonder if the banks would then be required to report it.

I would imagine Paypal, EBay, etc are lobbying hard to get rid of this. It will be detrimental to their business as the hobbyists sellers either quite or go underground with cash-only transactions.

I guess that will be coming,big brother is always looking over your shoulder to try a fleece you

[69Falcon]

IIRC there was a push to get banks to report any transactions over $500 here in the US a while back, and I think it got scuttled. I’d have to look.


Edit: A controversial provision of the Build Back Better bill is bank account reporting, the requirement that financial institutions report total bank account outflows and inflows from a taxpayer’s accounts on a yearly basis. The original threshold for reporting was set at $600 but now has been raised to $10,000. Bank reporting would become effective for the tax year 2023.

https://www.frazierdeeter.com/insights/treasury-offers-facts-v-fiction-points-on-reporting/

So not just PayPal and the like, but they were trying to get your info from the banks too.

[ricksax]

Related to this issue, I have always wondered how a motorcycle salvage yard (bike breaker) manages to do its accounting. That is, if it buys a crashed bike at auction for $400, and sells all the good pieces on ebay for $2000 total, how do they apportion the basis value for each sale of hundreds of smaller parts? Many of the parts of that bike are going to stay in inventory for years. And how would you demonstrate to the IRS what was the cost of the part, and what was the profit?

I have found many smaller pieces for my Hawk and XL350 from these vendors, and I've wondered if it was worth it to them. They have to pull it out, photograph it, and write the listing. But if it is a part that is NLA, then we don't have many choices.

Maybe they need a good junkyard dog to face the IRS.

[riot]

Well, what is not clear is how the new payment processing rules will impact an individual tax return. Generally, small amounts of income from low value transactions are just blanketed under the standard deduction, so unless you are selling enough to make a significant dent in your deduction, really nothing will change. There will not be any additional reporting requirements for the individual, except inputting the 1099 income from the form. For the average taxpayer, raising the standard deduction is always a benefit in simplicity at tax time, so that's what I would lobby for!

I think this rule (and most similar rules) are aimed at anti-money laundering, so they can get better tracing for drug dealers and such. Not really to tax people more.

If you are making $10k plus in sales, then really business accounting and an LLC could be a huge benefit in terms of deductions. You could get tax credit on all kinds of things. Plus having an LLC (when done correctly) provides liability protection - which is a big deal when creating and selling vehicle parts (especiallly custom designed).

[dhotop]

[QUOTE=ricksax;n969085]Related to this issue, I have always wondered how a motorcycle salvage yard (bike breaker) manages to do its accounting. That is, if it buys a crashed bike at auction for $400, and sells all the good pieces on ebay for $2000 total, how do they apportion the basis value for each sale of hundreds of smaller parts? Many of the parts of that bike are going to stay in inventory for years. And how would you demonstrate to the IRS what was the cost of the part, and what was the profit?

There are two acceptable financial accounting methods, cash-based and accrual-based. Your example is a perfect demonstration of the benefit of cash-based accounting. They recognize the $400 expense in the year it was bough and then they subsequently recognize the income from each piece in the year it sells.

If they were doing accrual-based accounting, they'd have to do an upfront itemization of all the parts and assign a % of the $400 cost to each one & carry them in inventory at that cost basis, then do annual inventory audit counts, etc. Then, as each part sold, they would recognize its assigned cost, sale price and profit. PITA, which is why cash-based accounting is much better for something like this.

[dhotop]

Well, what is not clear is how the new payment processing rules will impact an individual tax return. Generally, small amounts of income from low value transactions are just blanketed under the standard deduction, so unless you are selling enough to make a significant dent in your deduction, really nothing will change. There will not be any additional reporting requirements for the individual, except inputting the 1099 income from the form. For the average taxpayer, raising the standard deduction is always a benefit in simplicity at tax time, so that's what I would lobby for!

I think this rule (and most similar rules) are aimed at anti-money laundering, so they can get better tracing for drug dealers and such. Not really to tax people more.

If you are making $10k plus in sales, then really business accounting and an LLC could be a huge benefit in terms of deductions. You could get tax credit on all kinds of things. Plus having an LLC (when done correctly) provides liability protection - which is a big deal when creating and selling vehicle parts (especiallly custom designed).

It really is to tax people more. Sorry, but that's exactly what it is about and why the IRS is hiring 72,000 more agents. If you make $, in any way, shape or form, the gov't taxes it. Even if you literally find a bag of money, you are supposed to report it and pay taxes on it. Any time you end the day with more $ than you started the day with, the gov't wants part of it.

The way it will work is you will need to report a line of income that matches the 1099. Most likely on a schedule C. From there, you can deduct any expenses incurred to achieve that reported 1099 income. If your expenses were less than 1099 income, you have a profit and owe taxes on it. If your expenses were higher than your 1099 income you have a loss and either carry it forward to future years or use it as an offset to other net income, depending on your situation.

From my understanding of it, your standard deduction or personal exemptions are not at all related to this.

[dhotop]

I'm very optimistic this will go away in a bipartisan fashion. On one side, it is a regressive tax that will hit low-income people hard and on the other side, it is an attack on entrepreneurialism. Plenty of reasons for all political stripes to not like it & repeal it. Fingers crossed.