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Be careful if you sell online. The Internal Revenue Service may know a lot more about your side hustle this tax season. And the agency is cracking down on those who fail to report the added income.
Anyone who earned more than $5,000 in 2024 selling tickets, musical instruments or other goods and services online should expect to get a 1099-K tax form this month.
What Changes in the Tax Rules
Online platforms such as StubHub, Etsy and eBay previously only had to send these forms to users who earned more than $20,000 in most cases. Beginning Jan. 1, 2024, payment platforms such as PayPal, Square and Venmo must report payments totaling $5,000 or more in a calendar year, with no transaction minimum. The 1099-K threshold will drop to $2,500 in 2025 and finally $600 in 2026 unless the IRS makes more changes.
It’s time you get your financial house in order this tax season. The lowered threshold means forms will be sent to millions more taxpayers to make sure they account for the income on their tax returns.
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“The IRS wants to get the message out that they’re enforcing the laws around people who have a part time business on eBay, Etsy, or reselling tickets on Ticketmaster,” said Lee Heisman, a partner at Exit Wealth Advisors in Atlanta.
The threshold was supposed to be dropped to $600 in 2021 after Congress passed changes to ensure taxes get paid on income from gig work and selling concert tickets or other things online.
The Online Ticket Resellers Push Back
When online platforms complained about the extra record-keeping this required and the confusion it caused, the rules were delayed. Instead, the IRS chose to phase in the change, setting the $5,000 threshold for the 2024 tax year, $2,500 for 2025 and $600 for 2026.
Even without the forms, taxpayers were already required to report their income on returns, but many never did. In general, people tend to underreport income when no forms are sent to them. This has been my experience over the past 30 years of giving financial advice. Almost no one lies about their salary income, on the other hand, since the details are reported on Form W-2.
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So, this may be the first tax season where if you sold candles and soap online, resold some of your sports memorabilia, or put half of your season tickets up for resale that you may have an additional tax bill.
Who Might the IRS Target?
The IRS has generally had questions for those who never report their online income, and those people who don’t report may face steep penalties. The IRS has launched an investigation into taxpayers who earned money as experts on the online platform and allegedly failed to accurately report income from 2017 through 2020.
As an example, Just Answer experts such as veterinarians and mechanics were generally paid between $15 and $25 for each question they responded to. A judge in December authorized the IRS to issue a summons requiring Just Answer to provide the names of anyone who earned $5,000 or more on the platform in any one year in that time period, when the company apparently wasn’t sending out 1099 forms.
One taxpayer audited in 2020 had more than $400,000 of unreported income for four years of answering questions, according to an IRS agent’s declaration. As part of the investigation, the agent identified four Just Answer users who appear to have failed to report their Just Answer compensation on their tax returns. One is suspected of having unreported income of more than $1.3 million earned from answering over 86,000 questions.
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When is it a Hobby and When is it a Business?
Whether you get a 1099-K or not, when you start to generate revenue, you should consider this a business. This is true even if you only sell $2,500 of products or tickets on one of the online selling marketplaces.
In my view, it’s always a best practice to have a separation of church and state. Meaning that you should set up an official LLC or plan to file a Schedule C, set up a separate credit card, and a set up a separate bank account. This way, you can make a demarcation line from your business of selling items online away from the day to day of your personal finances.
In general, if your business claims a net loss for too many years (three out of five) or fails to meet other requirements deemed by the IRS then it may be classified as a hobby. If the IRS deems that it is a hobby, then all your business deductions could be disallowed.
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Being ignorant around the changes in the tax law and telling the IRS you didn’t know isn’t going to be an appropriate defense if you get audited. If you make any money at all trading collectibles, selling tickets, or living out your side hustle on Etsy, it’s important you understand these rules changes for 2024 and the upcoming years in 2025, 2026, and beyond.
Hopefully the IRS will never audit you, but if they do you can prepare to have your “tax” ducks all lined up and ready to go!
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