What is the $600 rule?
As part of the American Rescue Plan of 2021, e-commerce giants, credit card companies and payment apps will eventually be required to report payments for goods and services if they exceed $600 per year from any number of transactions — a major change from the current reporting threshold of $20,000 over 200 transactions.
The requirement had been set to come into effect for tax returns filed in early 2024, but following complaints from taxpayers, tax professionals and payment processors — who slammed the change as “unwarranted and unfair” — the IRS announced a compromise: an interim threshold of $5,000 for the 2024 tax year, applicable to tax returns filed in 2025.
The $600 threshold will then take effect for 2025, and affected taxpayers can expect to receive their 1099-Ks in time to file their returns in early 2026.
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Who is affected?
The 1099-K income threshold applies to transactions on online marketplaces (also called third party settlement organizations or TPSOs) like Etsy, eBay and StubHub and the third-party payment networks they use, including PayPal, Square and CashApp.
For instance, if you sell handmade jewelry, art or home décor on Etsy and your transactions meet the threshold, Etsy will send you a 1099-K form so that you can report that income to the IRS. The same goes if you sell any personal items online such as a car, refrigerator, furniture, stereo or clothes.
Importantly, the reporting requirement doesn’t apply to personal transactions such as birthday gifts or payments sent between individuals to split restaurant bills or household expenses.
The IRS estimates the $600 threshold, when it takes effect, will result in the distribution of 44 million 1099-Ks sent to many U.S. taxpayers who wouldn't expect one and may not have a tax obligation.
This decision to delay represents “a victory for common-sense tax policy by ensuring that consumers are not facing a tsunami of 1099-Ks in January,” according to Arshi Siddiqui, a partner at Akin Gump, who is leading the lobbying efforts for the Coalition for 1099-K Fairness, a group of online marketplaces opposing the tax change.
How to prepare your taxes
The lower 1099-K reporting thresholds should not stop you from earning a little extra cash by selling items online, as long as you keep good records of all your transactions, including original receipts and how much you sold items for.
You should also keep track of fees you pay to the online marketplace, as well as any shipping costs and bank fees. If you’re selling handmade crafts or services, you should record the cost of your materials, equipment, and work space, too. All these expenses can be subtracted from your net profit.
It is important to keep good records even if you don’t hit the $20,000 threshold over 200 transactions in 2023 and don’t expect to hit the $5,000 threshold in 2024. The $600 rule, when it eventually comes into place, will be easy to hit, so getting into good habits before then will help you in the long run.
If you receive a 1099-K for the first time after the reporting threshold has been lowered, the last thing you want to do is overpay on your taxes. If you’re not sure how to report your income on the form, you can get help from a tax prep professional or financial planner who can guide you through the process.
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