Making sense of the new 1099-K rule

It’s a new year, and that means there are some new tax rules that impact small business owners. Of particular interest for this article is the new 1099-K rule for digital payment processors. I’ve decided to write about it despite not wanting to have these kinds of articles on the site because I always thought they were too specific. However, I’m seeing a lot of misunderstandings, and, frankly, misplaced and unnecessary outrage of this rule change.

What’s a 1099-K?

This is a form the U.S. IRS requires “merchant marketplace” (eBay, Etsy, Amazon, etc.) and payment processor (Square, Venmo, Paypal, etc.) services to report how much income your business is generating from their use. Essentially, it’s catching up to the 21st century where the gig economy and modern smartphones have all but smashed the obstacles to starting a successful, income-generating business. If you are employed, you get a W-2, and the IRS gets a copy. Its the way your employer reports how much they paid you and withheld for their obligations. The 1099-K is sort of like that.

What’s changed for 2022?

Prior to the 2022 tax year, 1099-Ks were used to report about your business after it met two conditions:

I’m passionate about sharing valuable insights on my website. Your $3 donation will help me cover hosting expenses. Please donate now!👇

1. It made $20,000 in sales for a specific marketplace or through a specific payment processor. AND
2. You made 200 sales for a specific marketplace or through a specific payment processor.

e.g. If you made 250 sales on Etsy that totaled $50,000, then Etsy sent you and the IRS a 1099-K saying as much. If you made 150 sales totaling $50,000 then Etsy didn’t send a 1099-K. The same is true if you made 500 sales totaling $15,000, Etsy didn’t send a 1099-K.

From now on there is only one condition that’s checked to determine if a 1099-K is sent:

1. If you make $600 or more on a specific marketplace or through a specific payment processor.

How does this affect my income taxes?

If you’ve been properly recording your income and expenses this will not affect your income taxes from a money standpoint. You’re reporting the same amounts, and paying the same amount of income taxes. If you’re accounting is 100% honest, this is only a paperwork change, and one that works in your favor since it provides you with a good way to validate your bookkeeping.

Misconceptions and outright dishonesty

These are some of the points that prompted this article in the first place.

The point brought up	My response
“let’s be real here, not everyone reports ‘income’…a person that is selling crafts as a hobby will now have to report that as income, where it used to be play money for them”	it was never play money. Making crafts is the hobby, selling them is business and comes with responsibilities. The only people getting pissed off about this rule are people who weren’t honest about their business income in the past.
“I barely made $1k from my business and already paid X amount in taxes so the total was less. The amount was $12k but the IRS wants to screw the poor people”	If your gross income was $12k, it’s highly unlikely that your taxable income or profit would be $12k. That’s just an unrealistic expectation. It shows a dangerous lack of understand for basic business concepts.
If I sell something via Venmo at my yard sale for $650, I already paid sales tax on it. Now Venmo has to report that money and I have to pay more taxes on it.	You bought the thing at retail for personal use. Sales tax and income tax are completely different things. To group all taxes you encounter in life as “tax” and think that once you’ve paid one “tax” you shouldn’t have to pay another is childish at best.
If I am selling on Etsy and I make 650 bucks for the year, I’ll now get a 1099k and I have to report that where as before, it didn’t effect my income tax because I didn’t make more than 20,000 a year to get a 1099 from Etsy	You had to report it before. Getting a 1099-K is not the determining factor for whether or not you report income!
I am a professional business owner but I started off as a single mom looking for ways to make money to feed my kid, 11 years ago. Every little bit I didn’t have to report helped.	You did have to report it. You chose not to. Our personal situations, whether or not you agree with it, are irrelevant. We all have challenges, this shit isn’t easy, but if you’re doing it for the right reasons, it’s worth it.

Look, if you genuinely didn’t understand that 1099-K has nothing to do with what income you’re supposed to report to the IRS, then please visit the IRS webpage on 1099-Ks, and learn about this important part of your business. If I haven’t made it clear by now: you’re supposed to report all income to the IRS. I take my art business seriously, and encourage others to as well. If you’re like me, you’re working hard to grow and sustain an art business, made even tougher in the past couple of years. The last thing you need is the IRS coming after you.

Finally, I understand this was a bit of a rant article as well as educational content. If you’d like to read something lighter, like learning how to expand your sales channels to grow your income (that you need to report), then I suggest starting on my COVID Shift series. For many creatives, COVID forced big changes to how we sell our work. In this series, I break down how to effectively make that shift without too much pain.