We are often asked if one has to pay taxes when selling goods or services online. That question became even more relevant this week when the IRS postponed the new “$600 Rule.” This is a particular relief for those wo receive payments through popular third party payment applications such as PayPal and Venmo.
Congress has been searching for tax strategies to tap into the failure of US taxpayers to report online earnings as part of their gross income. The $600 Rule was intended to identify US taxpayers who earn income from online sales, and simply remove the ability to hide this income from the IRS. In fact, the online platforms are now required to provide the IRS with detailed information regarding online sellers who exceed volume thresholds (i.e. $600/year) or more than 200 individual transactions.
New Tax Established by the American Rescue Plan
The source of the new taxes when selling goods and services online was the “American Rescue Plan” which would have required online payment platforms such PayPal, Venmo, Airbnb, eBay and Etsy to send IRS Form 1099-K to the IRS and any user whose transactions exceeded $600 in sales during a calendar year. This should have taken place this year but has since been postponed as the IRS will consider 2023 to be “an additional transition year” instead of the beginning of the $600 reporting threshold.
The IRS will still require these platforms to provide a Form 1099-K for any users whose gross income exceeded $20,000 for the calendar year of 2023 as well as for those who conducted more than 200 separate transactions within 2023. The recent postponement by the IRS raised the reporting threshold for 2024 to a gross income exceeding $5,000 or 200 separate transactions. The $600 threshold is now scheduled to be implemented for calendar year 2025.
Danny Werfel is the IRS Commissioner who commented on this announcement. He wanted to make sure Americans understood this threshold didn’t create “unnecessary confusion” for “taxpayers, tax professionals and others in this area.” PayPal was quick to note the reporting requirements do not apply to “things like paying your family or friends back … for dinner, gifts, shared trips.” The extent of amounts to be reported and future thresholds remains to be clarified by the IRS.
Who is Required to Pay Taxes When Selling Goods or Services Online?
9 US states presently do not tax personal income. Each state has its own requirements regarding the disclosure of income from online sales on appropriate tax forms. It is the responsibility of the taxpayer to understand the reporting requirements for their own taxing jurisdictions (i.e. federal, state and local taxation) as well as associated sales and/or use taxes.
Presently, here in California our taxpayers are responsible for reporting income when selling goods and services online as well as collecting and paying tax on internet sales. This responsibility extends use tax (sales tax) on all internet sales “unless an internet sale is made through a marketplace and a marketplace facilitator, as defined in the Marketplace Facilitator Act, is the seller and retailer responsible for paying or collecting tax on that sale.”
For example, there is a popular video-based website that allows users to establish their own “Channel” and sell access to video products. The platform itself collects and submits associated sales tax on all transactions. In this example, under California law you are not required to “collect and remit” the sales (use) tax on each transaction, as the platform itself is collecting and remitting them on your behalf. You are, however, required to report the income you achieve from this online activity.
The reality is that most individuals simply don’t report their online income. That was the purpose behind the “$600 Rule.” You may not personally believe that the money you make by selling things online or on popular auction sites or renting out your home a few days per year on a popular app is income that should be reported on your taxes. Unfortunately, US tax laws and the IRS vehemently disagree and they are looking for a way to track and tax that income.
The recent decision by the IRS to delay reporting thresholds when selling goods and services online provides some extra time before a US taxpayer will be forced to disclose this income. Remember, if the IRS or your state audits you, the auditor will have access to your bank account information and will inevitably ask about unreported deposits and income associated with online transactions.
