Many small business owners and hobbyists selling on platforms like Etsy, eBay, and Amazon, or collecting payments with PayPal, Venmo, Etsy Payments, etc. are confused about the new tax law that went into effect January 1, 2022.
Let’s take a look at some of the common questions regarding the new law and what you might need to do to follow it.
Disclaimer: I am not an accountant or tax expert and cannot answer specific questions about your situation. I will do my best to keep this article up to date with the most current information but I make no representations as to the accuracy or completeness of any information on this site or found by following any links.
What is the new (2022) tax law?
The new tax law states that mobile money apps (also referred to as Third-Party Settlement Organizations (TPSO), third-party payment companies, third-party networks, etc.) are now required to report a user’s commercial transactions to the IRS (Internal Revenue Service) when they total over $600 in a calendar year.
Previously, these mobile money apps only had to provide reports for users with over 200 commercial transactions that totaled more than $20,000.
The law has simply lowered the threshold for goods and services reported on a 1099-K tax form.
What is a 1099-K tax form?
As stated by the IRS, “Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance.”
You can learn more about Form 1099-K here.
Does the new tax law impact my 2021 taxes?
The new tax law will be applied to your earnings for 2022 and what you report when you file your tax return in 2023. However, how you report your taxes does not change from this year to next; you’ll simply have (in most cases) more 1099-K forms next year to help you with your reporting.
What are Third-Party Network Transactions?
These are transactions conducted through a network, platform, app, etc. that digitally transfers money from one account to another.
Examples of these apps/companies/platforms are:
- Etsy Payments
- Cash App
- Meta Pay
- E-transfers between banks
What’s considered a commercial transaction?
A commercial transaction is when you receive money for goods or services you’ve provided.
A commercial transaction may occur when you:
- Sell a product for profit through Etsy and use Etsy Payments to collect the customer’s payment.
- Make a sale at a craft show and use a Square Reader to accept a credit card payment from a customer.
- A family member buys one of your handmade products as a gift for someone and transfers the payment to you through PayPal.
- You buy an item on Kijiji or Facebook Marketplace, fix it up, and sell it at a higher price on a marketplace and receive payment for it through Venmo.
If you’re selling a personal item at a lower value than you purchased it for, it is not considered a commercial transaction. However, if you’re selling that item at a higher cost than you paid for it, you’re profiting on the sale and it’s considered a commercial transaction.
For example, let’s say I have a mirror I purchased for $200 and it no longer fits the style of my home so I sell it through Etsy and list it for $150. I’m not making a profit on that sale and the $150 won’t count towards my $600 threshold.
But let’s say I sell the mirror for $250. Now I’ve made a profit and it’s considered a commercial transaction.
If you often sell personal items at a lower price than you paid for them, be sure to keep records in case you ever get audited. You’ll need to prove you spent more on it than you sold it for.
Personal transactions are different from commercial transactions and aren’t included in this new tax law.
A personal transaction may happen when you go for dinner with a friend, you put the bill on your credit card, and then your friend transfers you money through PayPal for their part of the bill. Or, a family member may digitally transfer money to you as a gift; that’s considered a personal transaction.
Why did the IRS lower the threshold to $600?
The new law is part of the American Rescue Plan Act, which you can read more about here.
In general, the IRS is implementing this change to improve voluntary tax compliance. When people think the IRS is keeping closer tabs on them, they’re more likely to follow the rules.
Prior to this change, the IRS only received reports on third-party network transactions when those transactions totaled over $20,000 for one account/user (and over 200 transactions). This made it easier for a lot of transactions to go under the IRS’s radar and for people to avoid reporting all of their income.
Now the IRS will have a copy of your tax form from a money app if you received over $600 in payments through them. They’re going to have reports for a LOT more transactions.
What do I need to do?
This new tax law does not change how you report your income to the IRS (you should be following the same rules when it comes to taxes). It may simply mean that you’ll be receiving more 1099-K forms from money apps, but you should be reporting that income whether or not you receive one.
In short, nothing is changing in terms of how you are taxed. How your transactions are reported by Third-Party Settlement Organizations to the IRS and to you, is the only thing that’s changing.
However, there are a few steps you may want to, or be required to, take:
1. Create separate payment accounts
Although the IRS doesn’t consider personal transactions as income, it will make it easier for you, or your accountant, to calculate income if you use one payment account for personal transactions and one for commercial transactions.
2. Submit tax information to payment apps
Companies such as PayPal, Etsy, etc. may require information from you such as your:
- EIN (employer identification number)
- ITIN (individual tax identification number
- SSN (social security number)
These companies need your valid taxpayer information to prepare your Form 1099-K. If you don’t already have your taxpayer information on file with them or you don’t submit them by a deadline or threshold, your account may be suspended or shut down.
They may be reaching out to request the information or to obtain more information to help verify your tax information.
Even if you’re not requested to provide information, it’s your responsibility to ensure the information they have on file for you/your business is correct.
Where do I add my tax information on Etsy?
When you’re logged into Etsy, head to: Shop Manager -> Finances -> Legal and tax information. From there, you can click Edit to add or update information and then save.
What if I have more than one Etsy shop?
Because you should be using the same taxpayer ID for both your shops, Etsy will track your total sales and send you one 1099-K. This means if you make $300 in one shop and $300 in another, your total will be $600 and Etsy will be sending the IRS and you a 1099-K for those transactions.
3. Verify your Form 1099-K
If and when you receive your Form 1099-K from any third-party payment company you use, check to ensure the information is correct (e.g. your personal information, tax identification numbers, number of transactions and transaction amount made through the app, etc.)
You’ll use the amounts shown on your Form 1099-K when filing your income tax return for the 2022 tax year.
*As a side note, now is a good time to ensure your small business is following all the laws, not just tax-related ones. Laws for Selling Handmade will help.
When will I receive a Form 1099-K?
You should receive your Form 1099-K by January 31st. This new law went into effect January 1st, 2022, so unless your total transactions with a third-party payment company were over $20,000 and 200+ transactions, you won’t receive a Form 1099-K until January of 2023 (and only if your total is over $600).
What if I don’t receive a Form 1099-K?
You’re still required to report all of your income, even if you don’t receive a Form 1099-K.
I don’t live in the US, does this apply to me?
If you aren’t located in the US and don’t need to file a US tax return, these tax laws don’t apply to you.
Because US Etsy sellers must use Etsy Payments, they are required to have their tax information on their Etsy account. If US sellers don’t have their tax information on file with Etsy and they get close to reaching the $600 threshold, Etsy will freeze their shop so they’re unable to list or sell items.
As mentioned, I’m not an accountant and am unable to answer specific questions regarding your business, income, and tax reports. You can find more information through the links below, or by contacting an accountant.
I hope this information was helpful!
You may also be interested in: Does Etsy Automatically Charge Sales Tax? as well as the unexpected costs associated with running an Etsy shop.