1099-K taxes - facts, fiction, and the future of G&S payments

[mueller]

UPDATED Q1 2023

If you're here looking for my feedback, links are at the bottom

Diving into this issue because I've read a lot of BAD information and want to share real, researched, actual experience.
- I'm not a tax professional and this is not legal or tax advice
- I am not smart. Probably have something wrong. If you're sure, tell me so I can fix it!
- I do not advocate for any scenario that constitutes tax evasion
- Let's keep discussion constructive --- save the nutjob political diatribes & finger-pointing for the automag forum LOL

---

I've sold a lot of stuff online in my life. Made some money. Dealt with 1099-Ks. Tax code already changed in several states including mine --- I get 1099'ed after $1000 revenue.

You've probably heard that the tax code tightens up significantly in the next year. If you receive over $600 via goods and services, on any platform, expect to receive a 1099-K. UPDATE: this legislation was stalled nationally for now. Similar state level rules are enacted

There's a lot of discussion of this online including the PB community and unfortunately most of it is, at best, misleading. So I'm sharing my experience to

1. Help my fellow paintballers stay out of trouble,
2. Help explain to anyone, as I clear out a few remaining items, why I'm requesting cash/check.

Sellers who file taxes "properly" will owe 25-40% tax against G&S payments you send them
The IRS considers payment for goods as services as taxable income. Just like you pay taxes on your paycheck, sellers who are 1099'ed must pay taxes on that income.

On top of income tax, the seller might also pay FICA taxes and state taxes depending on whether they file as a small business/LLC. Add it all up and the tax liability on your payment may exceed 40%!


But I told the seller I'll cover fees, what's the problem?
This is not the same as transaction fees. This is about paying tax against income received --- your payment represents income to seller. If seller files as a small business, or is in a state that has tight 1099K rules, they pay taxes against your payment.

But can't the seller just write off the sale as a loss? That paintball gun was $1500 in 2006!
The seller can technically write off whatever value they want as cost of item --- but if the IRS audits them it has to hold up. Tax claims require solid paperwork/receipts. I'm not getting into what might qualify as a receipt here, suffice to say the IRS is a lot picker than "here's an ad from 2006 from Bob Long, so I'm declaring $1600 as my cost"


So you're a seller and got a 1099-K, what now? 3 options summarized (as of 2022...)

1. Ignore it and hope the IRS doesn't notice that your income doesn't add up.
   • PROS: No reported income = no taxes!
   • PROS: Zero effort
   • CONS: If you got a1099K the IRS has a copy too, simple as that. Ignoring a 1099 is like ignoring filing taxes for your W2.
2. File the 1099-K income as hobby
   • PROS: You can deduct cost of goods sold (COGS) --- in other words subtract the cost of goods from the 1099K income
   • PROS: You don't pay FICA / business taxes
   • CONS: Deductions are VERY limited - can't deduct shipping, ebay fees, etc etc.
   • CONS: You need to prove your COGS if IRS asks
3. File the 1099-K income as a business - Schedule C
   • PROS: Deduct COGS
   • PROS: Deduct business expenses -- shipping, ebay fees, etc. are "advertising, commissions, etc" on Schedule C.
   • CONS: You pay FICA taxes (+15% ish) on profit
   • CONS: You need to prove your COGS if IRS asks
   • CONS: Most complicated filing option. Though it's not all that bad really.

#1 is a crapshoot.
#2 is appealing if you sell a few large transactions & didn't pay much in fees/shipping.
#3 is appealing if you sell a lot of transactions & rack up shipping and sales fees. Ebay sellers are more likely to fit here.

Most importantly --- both 2 & 3 reduce your taxable base by deducting cost of goods sold. So if you sell $12000, and my cost of those goods was $10000, you only owe tax on a net income of $2000 (or less if you have more deductions). This will be a critical factor in how you file and what you owe.


My items cost me more than this 1099-K amount. I deduct COGS and I owe nothing, right?
That's true! But with one critical caveat.

Can you furnish proof to the IRS if they audited? Not some half-baked valuation but actual, item-specific purchase receipts for any and all items you sold?

Yea, didn't think so. So now you're playing an odds game on whether the IRS will come knocking. The burden of proof for COGS deduction is on you and it needs to be solid. If you can't prove COGS, you can't deduct it and all the money on your 1099K will be taxable. Plus dealing with an audit. Worst case scenario.


Where do F&F payments fit into this?
There's a good link below on F&F vs. G&S. Bottom line, Friends & family is not reported in 1099-K income today, under 2022 tax code. BUT the IRS has said pretty plainly "... doesn't mean we're not watching for abuse"

You're probably safe to receive some money as F&F. It's not 100% risk free, if that money is for goods or services it technically constitutes tax evasion.

UPDATE: Paypal business accounts can no longer accept F&F payments as policy.


Well this all sucks huh. What now...
Yea it does. Taxes stink.

2023 is when the new 1099-K code fully implements. Everyone receiving over $600 G&S gets a 1099-K. Expect to see people scrambling to figure out how we can safely use F&F. Expect even more bad info to circulate. Opportunistic scammers will use it to prey on sellers. Check facts and be smart, safe.
UPDATE: legislation got stalled. All eyes on 2024 now.

I'm not advising anyone dodge taxes, that's illegal. You should not take friends and family payments if you are still able to do so. You should declare money received by check/money order/cash like a good tax paying citizen. Wink emoji.

Most importantly --- you'll see an uptick in requests for cash/check/money order/etc. There's a legit reason as you've read/seen above. Just use your best judgment and be safe with transactions!


A few decent links from reliable sources:
Great paypal writeup on the 2021-2022 tax law changes and 1099-K implications
IRS link on G&S versus F&F
H&R block writeup on filing as hobby vs. proprietor schedule C


If anyone came here on my link for a legit check, here's me....
Ebay feedback
PBN feedback

[flyweightnate]

Welp, looks like hobby filing for me next year... glad I save my receipts.

[Siress]

How can I prove COGS for items without a clear competitor ever having been on the market? e.g. unique items like art, or my used underwear (which adds value to the base item).

Sounds like cash is relevant again. Certainly easy and less volatile than crypto. Dramatically reduces the available market size, though, so crypto for anything where you need to ship it to someone.

[BlindFaith429]

Guess we will be going back to snail mail and postal money orders.

[pintbuster]

I used to mail cash here.

[mueller]

How can I prove COGS for items without a clear competitor ever having been on the market? e.g. unique items like art, or my used underwear (which adds value to the base item).

Sounds like you may be thinking of fair market value ---- which is hard to prove for unique items. It'll often involves comparable asset assessments (EG real estate)

COGS is very straightforward - it's the amount *you* paid another party for an asset. Market value is, for practical purposes, irrelevant in COGS. EG if I pay someone $2000 for an Aurora cocker and sell it later, my cost of goods was $2000 period. Doesn't matter what the market value is.

[Cunha]

Cogs isn’t just what you paid, but could involve cost of labor cleaning or storing an item.

when it’s a hobby how do they expect people to account for this?

[BLachance75]

When I had my taxes done this year I talked to my accountant about the 1099-k. His take was very simple, report them. Like was posted above you are only responsible for the difference between what you paid and what you sold something for. His advice was to keep a receipt of what you purchase and what you sell so you can prove the numbers if questioned.

In my case I filed a schedule c this year. I only received a 1099-k from square and that was all from honey sales. I had enough deductions to offset the 1099-k. I’ve been saving the receipts from all my bee related purchases so it wasn’t hard. I remember we deducted mileage but there was a few other things that were deducted as well that I wouldn’t have thought of.

[Savet]

I too, am not a tax professional, but I have stayed at a Holiday Inn Express a few times. A little bit of process on the front end saves you a ton of headache on the back end. You just bought something from your local paintball field? Take a picture of the item and the receipt. Google or Apple will back it up to the cloud. If you ever get audited, those pictures are the same level of proof as photocopied receipts, and are probably even more useful because you have a time-stamped color copy with metadata if you have that enabled on your camera. This is useful in a lot of situations. Thermal receipts deteriorate over time. The thermal printing fades. Paper copies can get lost and damaged. Get in the habit of taking a picture of everything that you buy and its accompanying receipt, and you'll always be prepared. If you bought it online, you will have an email copy of the purchase invoice. If you've bought anything within the last 10 years, there's not much excuse for not having something that references the original cost paid for the product. I will personally never buy an item with F&F with somebody that I do not know really well. You might as well just mail cash at that point and I'm not doing that either.

[Cunha]

Mailing money orders worked well for years for me and many folks here before PayPal.

but, whateverzzzz

Craigslist about to get a bump.

[OpusX]

Feedback threads had serious value back in the day cause of this. "X ships first" was a thing.

[pintbuster]

A trusted middleman can be used as well

[mueller]

Cogs isn’t just what you paid, but could involve cost of labor cleaning or storing an item.
when it’s a hobby how do they expect people to account for this?

Aye, true, cogs is a deep subject. Intentionally kept simple here since 98% of future 1099K recipients need only to know the simple application

I've never filed hobby so can't speak smartly on it but I know they really tightened up deductions for hobby filing as part of the TCJA

[the_matrix_guy]

Ew taxes.

It's absolutely absurd to drop the limit from $20k p/y to a measly $600 p/y especially after this 2+ year long serious pandemic that saw many people take leave or quit their jobs altogether. Actually these rules were announced while we were dead smack in the middle of the worst surges. And now surging inflation. These politicians are way out of touch.

But yes, as everyone alluded, keep receipts of everything you buy, including receipts for shipping, etc. and report everything that's g&s.

[iamthelazerviking]

Ok, I am an idiot and if it has been answered I am sorry (also lazy). Let's say I sold a marker for 750 but had paid around 825 for it some time before. PayPal used for both buying and selling it. I am not a business, I don't make profit (hardly ever). What "receipts" do I need to provide? Sounds like just taking the hit and paying, then not ever sending or receiving electronic payments for anything is easier. Get your nose out of my exchanging of funds for dirty used paintball gear. Are they going to start trying to require garage sales to keep receipts then pay tax on? Or when you sell a $10 lamp on craigslist?

[the_matrix_guy]

Everything past $600 per year. Thats when you get 1099’d as per the new cash app rules. The limit used to be 20 transactions up to $20k per year before you had to report it. Technically speaking, you’re supposed to report taxes on all dividends but garage sellers deal in cash so it’s impossible to track unless they sell tens of thousands worth of stuff and then deposit it all in an account out of nowhere. Especially if its a single deposit of $10k or more

[BLachance75]

Ok, I am an idiot and if it has been answered I am sorry (also lazy). Let's say I sold a marker for 750 but had paid around 825 for it some time before. PayPal used for both buying and selling it. I am not a business, I don't make profit (hardly ever). What "receipts" do I need to provide? Sounds like just taking the hit and paying, then not ever sending or receiving electronic payments for anything is easier. Get your nose out of my exchanging of funds for dirty used paintball gear. Are they going to start trying to require garage sales to keep receipts then pay tax on? Or when you sell a $10 lamp on craigslist?

You will want to save a copy of the transaction for when you bought it and when you sold it. That way if you get audited you will be able to prove that there wasn't a profit.

[maggot]

I did Schedule C this year as well. Claimed all expenses: mileage, internet, home office, shipping supplies, etc.
Actually was a net loss, and I paid LESS taxes overall because of it.

Hopefully this backfires on the bastards.

[BLachance75]

Can you claim all of your internet fee or is it a percentage. I didn't claim mine as an expense this year but will try next year.

[maggot]

I used a percentage. Bottom-line is that you should claim whatever you feel is justifiable and can be backed up if audited.

[Grendel]

As someone who has been audited multiples of times Maggot has the right idea. Keep records, file using as much common sense as you understand the tax code and be organized. Every time we have been audited the auditor was happily surprised by our records and only once did we need to get out the check book. This is even when we did not correctly interpret the tax code. Most of the time they saw we were close, corrected any misconception and said have a nice day and only once did we have to pay anything and it was without penalty it was just the difference between what they said and what we said [couple hundred bucks]. I believe things went so smoothly because we went into the audit with the appropriate records and a congenial attitude and it felt like the auditors breathed a sigh of relief.

Note we were getting audited mostly because of short lived businesses I built and sold and high donation flags not because we were trying to game the system. I also believe because I was part of an Article 5 lobbying group in the late 2000s to about 2015 but that is my tin hat conspiracy theory.