It’s TaxQuips time from TaxMama.com®
TodayTaxMama® wants to talk to you about all those pesky 1099Ks that you’re receiving this year.
Dear Family,
We’re getting questions from people who have suddenly started getting 1099Ks from their various casual sales – like Etsy, eBay, PayPal, Zelle, and other bank-like sources where they send or receive money.
Why are they getting these 1099Ks this year? The IRS dropped the reporting threshold to payments of $600 or more, instead of 200 transactions and $20,000.
Every one of those 1099Ks is reported to the IRS. The IRS computer is looking for those numbers in specific places on the tax return. Generally, the IRS computer wants to see that income amount on Schedule C.
Let’s outline the different ways people use these accounts and how to report these 1099Ks on their tax returns. Remember, please, this is a brief outline. It may be a bit technical (and therefore, boring), so feel free to skip the rest of this if it doesn’t apply to you or your family, friends, or clients.
If there is a lot of money involved, please work with a tax professional. (YOU decide how much is a LOT.)
Before I go forward, I will tell you that some people recommend that you report all this income on Schedule 1, when you are not in business. Don’t do that, except for hobbies. You’ll see why as we go along.
1) What are you supposed to do if you just use these payment systems to send or receive money to/from friends and family?
Keep things simple. Report the income on Schedule C as Other income.
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Then, on page 2 in Part V, deduct out that full amount. The description on the line is “Personal Transactions Only”.
You end up paying taxes on nothing.
2) What’s if you are using these payment systems purely to sell things in your home or garage? You’re just cleaning things out, without having an in-person garage sale.
Keep things simple. Report the income on Schedule C as Other income.
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Then, on page 2 in Part V, deduct out that full amount. The description on the line is “Garage Sales – No Profits.”
Of course, if you want to be meticulous, you can then, also report this on Schedule D. https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
In that case, change the description in Schedule C Part V to “Garage Sales – See Schedule D.”
On Schedule D, enter the amount from the 1099K in column (d) as the Proceeds. And the same amount in column (e) as the cost. Why – you cannot report a loss when you are selling personal property, so you want to zero out the loss.
Once again, you end up paying taxes on nothing.
3) You make things using your skills and talents and sell them to people who like them, just for fun. You’re not out to make a profit – and, in fact, you don’t generate more income than your costs.
In this case, you have a hobby.
Report your income on Schedule 1, as Other Income.
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
Take no deductions at all. Hobbyists are no longer permitted to deduct expenses. Perhaps that right will be restored after 2025, when the Trump Tax Cut expires.
In this case, you end up paying taxes on all your income.
But at least it’s not subject to self-employment taxes.
4) You’re actually selling things that you make or buy, or provide services in order to sell them for a profit. In that case, you’re in business – and should have been reporting this income all along. This is the population the IRS is trying to catch – folks who have taxable income and haven’t been reporting it. So, what do you do this year?
A) Report the income on Schedule C in box 1 as Gross Income.
B) Keep good records about your costs to make or buy the merchandise that you sold, and direct costs related to the services that you provide, and report those costs on Schedule C, Part III, Cost of Goods Sold. If you have costs for merchandise you didn’t sell, then they are not the cost of anything that was sold, right? So save those costs for next year. (Or learn how to report beginning and ending inventory.)
C) With good records, you will also have the data for all the other business expenses – enter those in Part II of Schedule C.
D) If you have mileage and office in home expenses – you need to learn how to compute and enter those on your Schedule C.
In other words, you need to do full-blown business reporting in order to reduce your net profits.
This will reduce two things for you – self-employment taxes (Schedule SE) and income tax (Form 1040).
My goal today is to help you avoid those under-reporting notices from the IRS and to help you reduce your tax burden. (Too many people are telling me that they are reporting their garage sale-type income and paying Self-Employment taxes – when they should not even have taxable income!) As long as the IRS computer finds the numbers where it expects to see them, you can wipe out the income when the activity is not taxable.
And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion
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