When the modern world of e-commerce collides with IRS reporting on Form 1099, this can be a challenge to navigate. With the business through online marketplaces and applications moving so fast, it can be hard to slow down and take IRS filing into account.
In this blog, we will help you do just that! We will take a closer look at the tax implications for business interactions and transactions made through an online marketplace or app. We’ll also take a look at what payments must be reported and what to do if you receive a 1099 from an online marketplace.
What is an Online Marketplace?
An online marketplace or app is a digital platform where buyers and sellers can engage in various transactions. These platforms enable individuals or businesses to sell products or services to a wide audience, often providing a seamless and convenient way to connect, make purchases, and conduct business in the virtual world.
Popular examples include e-commerce websites, mobile apps, and online service providers that facilitate a broad range of transactions, from selling handmade crafts to booking services or sharing accommodations. Some of the giants of the online marketplace sector include Amazon, Etsy, and Facebook Marketplace.
Online marketplaces and apps have become integral to today’s digital economy, offering opportunities for entrepreneurs, freelancers, and consumers to connect and trade. But of course, like every other business type, online marketplaces are also obliged to maintain compliance with the IRS and other required reporting agencies.
Which 1099 Form is Used to Report Online Marketplace Transactions?
While it hasn’t been a particularly popular tax form until the 2023 tax year, Form 1099-K is used to report these transactions. Before the 2023 tax year, this form wasn’t encountered that often, as online marketplaces only had to file this form for payers that made 200 or more transactions totaling $20,000 or more.
What is IRS Form 1099-K?
In a nutshell, the Form 1099-K is an IRS document used to report payments received through payment settlement entities. For online marketplaces and apps, it comes into play when you’re receiving income from your transactions. For example, if you have a digital storefront where you sell the items you craft. This form is a way for the IRS to increase the transparency of income and payments generated in the digital realm.
Why the Sudden Popularity of Form 1099-K?
Great question, the IRS drastically changed the 1099-K threshold and made them effective for the 2023 tax year. Now, the IRS requires that ALL online payment transactions of $600 or more be reported to the IRS using Form 1099-K. This means that there will be a dramatic increase in the number of 1099-K forms that must be filed to the IRS and distributed to the payment recipients. This also means that many more taxpayers will receive a copy of the 1099-K, prompting some potential confusion as to what they need to do with it.
Why might I receive a 1099-K for Tax Year 2023?
If you have been the recipient of payments of $600 or more through an online marketplace or app, you are likely to receive a copy. It doesn’t matter if the $600 came from one single source or several smaller transactions. You would likely need to report this as ‘other income’.
What should I do with Form 1099-K if I receive a Copy?
The amount of income you generated and the purpose of the transaction will need to be taken into consideration when it comes to reporting 1099-K payments.
Example: 1099-K amount is taxable income
You have a small storefront on Etsy where you sell handcrafted goods. Throughout the course of the tax year, you’ve received a total of $2,000 in payments from customers. Etsy would issue you a 1099-K for this amount. In turn, you would need to report this amount as income on your own personal tax return for the year.
Example: 1099-K amount is NOT taxable income
Let’s say that you sold a guitar on Facebook Marketplace. You sell it for $500, but you originally purchased it for $800. Since you’ve taken a loss, this is not considered income. However, you can make an off-setting entry on Schedule 1 of your 1040. For more information on reporting gains and losses from 1099-K, check the IRS FAQs here.
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