As the 2024 tax season approaches, the Internal Revenue Service (IRS) is tightening its grip on online sellers, particularly those who earn income through platforms like eBay, Etsy, and StubHub. Starting January 1, 2024, significant changes to tax reporting requirements will affect anyone who sells goods or services online and earns over $5,000 in a calendar year. This shift marks a substantial decrease from the previous threshold of $20,000, which had been in place for many users of these platforms.
Under the new rules, payment processors such as PayPal, Square, and Venmo will be required to issue 1099-K forms to sellers who exceed the $5,000 earnings mark, with no minimum transaction requirement. This change aims to increase compliance and ensure that individuals report their online income accurately on their tax returns. The reporting threshold will continue to decrease in the following years, dropping to $2,500 in 2025 and $600 in 2026, unless further adjustments are made by the IRS.
Experts warn that this tax season could be the first time many sellers realize they may owe taxes on income earned from selling items like handmade crafts, concert tickets, or other goods online. Lee Heisman, a partner at Exit Wealth Advisors, emphasized that the IRS is serious about enforcing tax laws related to part-time businesses on these platforms. The agency aims to eliminate the confusion that has historically surrounded the reporting of online sales income.
The IRS’s decision to lower the reporting threshold stems from a desire to capture tax revenue from gig economy workers and casual sellers who may have previously underreported their income. Many taxpayers tend to overlook or underreport income that isn’t documented through traditional means, like W-2 forms from employers. This new requirement is expected to result in millions more taxpayers receiving 1099-K forms, prompting them to include this income on their tax returns.
In the past, the IRS had planned to implement a $600 threshold for reporting in 2021, but the rollout was delayed due to concerns from online platforms about the burden of tracking and reporting transactions. Instead, the agency opted for a phased approach, gradually lowering the threshold over several years.
Online sellers, especially those who may have viewed their activities as hobbies, are now being urged to treat their sales as businesses. This includes keeping accurate records, separating personal finances from business income, and understanding the implications of their sales for tax purposes. Failure to report income could lead to severe penalties, as the IRS has ramped up investigations into taxpayers who have not accurately reported their earnings.
As the IRS continues to scrutinize online income, sellers are advised to familiarize themselves with the new regulations and ensure they are prepared for the upcoming tax season. Understanding these changes is crucial for anyone engaged in online sales to avoid potential audits and penalties.