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Paypal Reporting Income to IRS with 1099-K. eBay Sales Over $20,000 AND Sold Over 200 Items

blackblaze 3,246 February 2, 2012 at 07:18 AM
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I was reading this article this morning and posted it in another thread regarding 1099-K

http://www.forbes.com/sites/kelly...taxpayers/

I know there are a lot of folks here who buy and sell (using Paypal to receive payments) based on slickdeals they come across. Some folks for profit, some folks, to get their item for free (buy 4, sell 3, get their slickdeal item free). I've been able to get some great deals going the route of buying a few extra and getting the item for free. However, with so many great slickdeals throughout the year and selling, for some, you may have cross the threshold of now receiving a 1099-K from Paypal ($20K gross received and 200 transactions) that is also reported to the IRS

http://www.irs.gov/instructions/i1099k/ar02.html

So, how does one handle this. Some questions that come to mind:

1. What distinguishes hobby seller from small business?
2. Reported amount is gross, not net, where is clarity to show just net income?
3. If you receive this form, and somehow show a result of net income, can you claim expenses, itemized deduction (mileage to acquire items, etc, etc.)?
4. Since this is new, how well are tax accountants prepared to help tax preparers to navigate this new form?
5. Should you create a new Paypal/Ebay account to account for selling personal items/friends items, etc vs items strictly for resale?

Wanted to open it up for discussion. Cool2

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#46
Quote from dancergrrrl3 View Post :
what happens if you just ignore the 1099 for 2011??? Wink

I'm seriously having a freak out moment...I got a 1099 in the mail and didn't realize that I had received that much via Paypal! I thought it was just a hobby LOL...now really, I have to backtrack the WHOLE YEAR?
It is either backtrack to the best of your abilities or pay the IRS more than you wanted. Im doing a month a day or two at a time. We have until April to get it right and at the same time, ensure we are properly setting ourselves up for 2012 taxes. I doing an Excel sheet right now, but bought Quickbooks. Still contemplating after Im done my backtracking if I should QB or not, based on reviews or leave things in Excel.

Also, you bring up a good point, hobby seller vs small business. Whether your making money from photography, selling junk you work on or on Ebay, once a certain amount of profit is turned, I think you are viewed as a small business and no longer considered a hobby seller.

Quote from roxwella View Post :
Everyone breathe Smilie http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Notice there on line 1a. "Merchant card and third party payments. For 2011, enter -0-"

Also, I recently attended an IRS convention and heard repeatedly that the service will not be matching these numbers to tax returns this year (doesn't mean that next year they wont look at this years return and compare it to your 1099k, or just see if you have a schedule C in there). With that said..if you are selling on the internet at these levels you best damn be reporting that income on your small business return, cause no matter what you think, you are a small business.

My suggestion, is to make sure that you are reporting AT THE LEAST the amount shown on the 1099k statement on your C. You can then expense the cost of your inventory, your fees, and whatever other expenses you can come up with to reduce that amount.

Also, be aware, your state government may have a gross receipts tax, sales tax, etc., and they may be requiring people selling over the internet to pay tax on those sales. If you report gross income on your C, you want to make sure that you are paying the appropriate sales tax, because the states are starting to match those numbers, Ive had a few clients audited recently due to this exact situation.

Final suggestion to everyone is not to think you are smarter than the taxing authorities, they will catch you eventually..and you will pay more then than if you report and pay the appropriate amounts now.

Good Luck!
Well, at least we get to write off some deductions, but my question to that is, if we are being viewed as a small business, what other items should we know about being a small business if we never saw ourselves that way to begin with Scratchchin

I hear terms of sole proprietorship, LLC, etc. Do we need to establish something of those sorts to do a schedule C? I haven't researched these items as of yet as Im still backtracking 2011 Sadwalk
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#47
Quote from blackblaze View Post :
It is either backtrack to the best of your abilities or pay the IRS more than you wanted. Im doing a month a day or two at a time. We have until April to get it right and at the same time, ensure we are properly setting ourselves up for 2012 taxes. I doing an Excel sheet right now, but bought Quickbooks. Still contemplating after Im done my backtracking if I should QB or not, based on reviews or leave things in Excel.
This is going to take a while LOL! I was going to work with Excel also, but I have been researching and found this software that looks like it would solve most of my problems going forward:

Easy Auctions Tracker [easyauctionstracker.com]

I have read a lot on it, watched the videos and it seems like just what I need. Has anybody tried this program???
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#48
Quote from dancergrrrl3 View Post :
This is going to take a while LOL! I was going to work with Excel also, but I have been researching and found this software that looks like it would solve most of my problems going forward:

Easy Auctions Tracker [easyauctionstracker.com]

I have read a lot on it, watched the videos and it seems like just what I need. Has anybody tried this program???
I've seen this software, but for $50, I think I'd rather stick with quickbooks that I got for $100. If it was $15, then I'd bite. I also want to track inventory bought, mileage to post office, shipping supplies bought and office supplies (ink, paper, printer, etc) used for Ebaying. This may track things to give you your net, but what about deductions?
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#49
Quote from blackblaze View Post :
I've seen this software, but for $50, I think I'd rather stick with quickbooks that I got for $100. If it was $15, then I'd bite. I also want to track inventory bought, mileage to post office, shipping supplies bought and office supplies (ink, paper, printer, etc) used for Ebaying. This may track things to give you your net, but what about deductions?
Yeah, I just like how it pulls everything into it automatically...I think I will do the free trial and see if I can add in things for deductions...have you found an Excel spreadsheet that works well? Does Quickbooks pull data from Ebay and Paypal for you?
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#50
Quote from blackblaze View Post :
It is either backtrack to the best of your abilities or pay the IRS more than you wanted. Im doing a month a day or two at a time. We have until April to get it right and at the same time, ensure we are properly setting ourselves up for 2012 taxes. I doing an Excel sheet right now, but bought Quickbooks. Still contemplating after Im done my backtracking if I should QB or not, based on reviews or leave things in Excel.

Also, you bring up a good point, hobby seller vs small business. Whether your making money from photography, selling junk you work on or on Ebay, once a certain amount of profit is turned, I think you are viewed as a small business and no longer considered a hobby seller.

Well, at least we get to write off some deductions, but my question to that is, if we are being viewed as a small business, what other items should we know about being a small business if we never saw ourselves that way to begin with Scratchchin

I hear terms of sole proprietorship, LLC, etc. Do we need to establish something of those sorts to do a schedule C? I haven't researched these items as of yet as Im still backtracking 2011 Sadwalk
A "hobby seller" still reports the income they make in the course of the hobby to the IRS, the difference is that they do not get to deduct hobby loss against ordinary income, and they are limited to deducting against that hobby income on the schedule A under misc deductions (which are limited to anything above 2% of AGI, and can only be used if they are in excess of the standard deduction). If you are making money, you want to be classified as a business. The IRS will actually challenge your business status if you have too many loss years in a row (at that point they make your business into a hobby with the above limitations).

Secondly, a sole proprietor is just a person in everyday business, requires no special forms or start up procedure. What you may require is a tax id from your state, or an employer id in the odd chance you employ another.
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#51
Quote from roxwella View Post :
A "hobby seller" still reports the income they make in the course of the hobby to the IRS, the difference is that they do not get to deduct hobby loss against ordinary income, and they are limited to deducting against that hobby income on the schedule A under misc deductions (which are limited to anything above 2% of AGI, and can only be used if they are in excess of the standard deduction). If you are making money, you want to be classified as a business. The IRS will actually challenge your business status if you have too many loss years in a row (at that point they make your business into a hobby with the above limitations).

Secondly, a sole proprietor is just a person in everyday business, requires no special forms or start up procedure. What you may require is a tax id from your state, or an employer id in the odd chance you employ another.
So, lets put out as an example that your gross is 50K reported by Paypal, profit is 10% of that, $5K. In general, how would one classify themselves and what schedule to use for tax purposes? Based on what your saying, if you claim hobby seller, you won't be able to claim as much regarding deductions. But if your recognized as a business, then you claim all the deductions that comes with being a business?
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#52
Exactly right. And dollar limits are not involved, if you are a sole proprietor or joint venture (basically all others but partnerships, c and s corps) you belong on the schedule C.
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#53
Quote from roxwella View Post :
Exactly right. And dollar limits are not involved, if you are a sole proprietor or joint venture (basically all others but partnerships, c and s corps) you belong on the schedule C.
Was reading this
http://www.irs.gov/irs/article/0,...56,00.html

And this stuck out
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year

So, adding to what you've already said, unless folks already set themselves up as a business in 2011, everyone here is a hobby seller (due to this being first year Paypal reports gross income) and the IRS could potentially see you as a business if the hobby creates profit for at least three years. So, schedule A it is.

Depending on how much profit folks made, and these new rules, I will assume there will be some folks wondering if they should register themselves as a business of some sorts?

Question: You mention the IRS can challenge your business into hobby selling limitation. Would they challenge hobby selling to be seen as business and make you do the necessary steps that is associated with that?
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#54
Oy, this is all very confusing to me, for some reason taxes are like Greek to me, and I'm a smart gal! I mean really, how hard are they going to make this for us...can't I just file taxes with the 1099 without being some kind of business with an ID, or picking some kind of "schedule" form?

Guess it's time to hire that tax guy...the husband is freaking out saying we need an accountant, a tax person, ect.

Also, I have done a lot of research on ways to track sales/profits/expenses. I have googled to my heart's content. At this point I will probably be making my own Excel Spreadsheet since I just purchased Office 2010. I would be interested in hearing what people are using...or if you already have a spreadsheet that you would be interested in sharing...
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#55
Quote from dancergrrrl3 View Post :
Oy, this is all very confusing to me, for some reason taxes are like Greek to me, and I'm a smart gal! I mean really, how hard are they going to make this for us...can't I just file taxes with the 1099 without being some kind of business with an ID, or picking some kind of "schedule" form?

Guess it's time to hire that tax guy...the husband is freaking out saying we need an accountant, a tax person, ect.

Also, I have done a lot of research on ways to track sales/profits/expenses. I have googled to my heart's content. At this point I will probably be making my own Excel Spreadsheet since I just purchased Office 2010. I would be interested in hearing what people are using...or if you already have a spreadsheet that you would be interested in sharing...
I can share my spreadsheet columns once set up (still working on it). As Im backtracking, Im refining. I'll send you a PM once I have those columns mapped out.
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Quote from blackblaze View Post :
I can share my spreadsheet columns once set up (still working on it). As Im backtracking, Im refining. I'll send you a PM once I have those columns mapped out.
thanks so much! hug
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#57
Quote from blackblaze View Post :
Was reading this
http://www.irs.gov/irs/article/0,...56,00.html

And this stuck out
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year

So, adding to what you've already said, unless folks already set themselves up as a business in 2011, everyone here is a hobby seller (due to this being first year Paypal reports gross income) and the IRS could potentially see you as a business if the hobby creates profit for at least three years. So, schedule A it is.

Depending on how much profit folks made, and these new rules, I will assume there will be some folks wondering if they should register themselves as a business of some sorts?

Question: You mention the IRS can challenge your business into hobby selling limitation. Would they challenge hobby selling to be seen as business and make you do the necessary steps that is associated with that?
This is a misinterpretation, many, if not most business start-ups do not make a profit their first, or second years around. The IRS tracks these loses, and if they go on too long they will make it a hobby.

The primary purpose for this hobby/business thing is that if they don't approach it like this, the rich will abuse the ability to take a loss on something fun (against their normal income), like a amusement park in their backyard that no one goes to, but they enjoy (major exaggeration, but these things happen).
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Quote from roxwella View Post :
This is a misinterpretation, many, if not most business start-ups do not make a profit their first, or second years around. The IRS tracks these loses, and if they go on too long they will make it a hobby.

The primary purpose for this hobby/business thing is that if they don't approach it like this, the rich will abuse the ability to take a loss on something fun (against their normal income), like a amusement park in their backyard that no one goes to, but they enjoy (major exaggeration, but these things happen).

Believe me..Schedule C, I do this for a living!
So even if you don't officially have a business, you can do Schedule C and claim deductions like a small business? Ahhhh, not enjoying tax season right now Frown
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#59
I figure this would be a question someone would eventually have, so the 1099-K reports gross on all incoming payments. As earlier said, cashback is to be excluded, but was not, and somehow that amount has to represented as excluded. What about used goods? Do you just put those in as a loss or do they count? If I sold my old Iphone, that amount is a part of the gross reported, but it was sold geared to what selling for profit on ebay, just sold cause no longer needed. Curious how to make those distinctions.
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Quote from blackblaze View Post :
So even if you don't officially have a business, you can do Schedule C and claim deductions like a small business? Ahhhh, not enjoying tax season right now Frown
I would like to know as well. Now that I received a 1099, I am going to be re-creating all of 2011 (FUN) and there are a lot of things I can deduct (gas, ect.). I also have a regular full time job. So what forms do I need to use to file this year? I think I will just go to a tax person...
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