New bill puts micro-vendors in IRS crosshairs

A provision in the American Rescue Plan Act of 2021 (aka the COVID Relief Bill) would put certain people’s online sales activity in the crosshairs of the IRS.

Some might rightly say this, but even people selling their old stuff as they clean out their basements and garages should sit up and take notice.

If you use PayPal, eBay, Etsy, or any electronic form of payment processing to collect money from buyers, you will be impacted if the amount a single entity processes on your behalf exceeds $600.

Many online sellers are familiar with the IRS Form 1099K, which marketplaces and payment processors send each January to sellers who have exceeded $20,000 in gross receipts when collected in more than 200 transactions. (For example, if you process $21,000 in 199 different transactions in a single tax year, the payment processor is not required to complete Form 1099K, although the thresholds used by each company in practice we don’t know and may vary.)

A provision in the 2021 Bailout Act would lower the threshold significantly — it would require companies to send a 1099K to sellers they transacted over $600 for, period. From our reading of the invoice wording, it appears that if you sell $601 worth of items, even in a single transaction, the payment processor is required to complete Form 1099K.

The provision amends Section 6050W of the IRS tax code – the relevant language is contained in Section E:


(a) In general. – Section 6050W(e) of the Internal Revenue Code of 1986 is amended as follows:

“(e) De minimis exception for third party settlement organizations. – A third party settlement organization is not required to report information under sub-section (a) with respect to transactions on the third party network of a participating payee if the amount that would otherwise be reported under paragraph (a)(2) in respect of such transactions does not exceed $600.”.

It also states that “the change made by paragraph (a) will apply to returns for calendar years beginning after December 31, 2021.” (We think this means it won’t apply to transactions processed in 2021 – stay tuned.)

This might come as a surprise to “consumer sellers” and, once understood, might discourage them from signing up on sites like eBay, Etsy, Poshmark, and Mercari, and instead encourage them to seek out classifieds-type sites like Craigslist and Facebook Marketplace. , where transactions are often processed in person with cash payments.

But the new provision may also impact occasional sellers who do more than clean their basements — even though they are expected to report their income to the IRS, whether they consider themselves “hobbyists” or not.

Seven years later in 2018, some sellers had a big surprise when they received 1099K, even though they were below the 1099K threshold. This came after Massachusetts and Vermont retroactively passed new laws requiring payment processors to file 1099Ks for sellers who processed at least $600 in 2017, and regardless of the number of transactions that they processed.

Other states may have jumped on the bandwagon since then, and it’s no surprise that a few years later the Feds are joining the party.

Although Form 1099K is not new, we have issued a reminder last month by tax guru Barbara Weltman: “What You Need to Know About 1099-K.”
With all the provisions of the new bill, this one went unnoticed – we started hearing reports over the weekend, including a article in Politics on how it may affect gig workers like Uber drivers.

Note that freelancers have historically had payments over $600 reported to the IRS by companies hiring them through Form 1099-MISC.

The House of Representatives passed the US Bailout Act of 2021 on February 27, 2021, and the Senate passed a revised version on March 6, 2021. (We believe the provision affecting 1099K remained intact in the Senate version .) The bill goes back to the House, which must approve the Senate changes before the legislation can be signed into law by President Biden.

According to CNN, the bill includes some good news for small businesses such as loan and grant funding for small businesses, as well as many other provisions, including aid to states and municipalities.
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