New Tax Laws -- Info for Confused Small Sellers

[the-orange-cat]

THIS IS A POSITIVE THREAD. PLEASE DON'T TURN IT INTO A WHINE-FEST!

I am NOT an attorney or accountant. Just a small seller, like you. Been on here for 20 years, now. Since the days of checks, cash and money orders only. Casual seller, mostly things from my house that we don't want. It's been about making a little bit of money so that I could buy the things I like from other sellers cleaning out their own houses (smile). One collection feeding another, if you like. Can't think of a thing I've ever sold that made a profit, that's for sure. Like the old Harold Arlen song says, "It's been fun. Now I'm done. But I'll never sing a loser's song. So long."

This is not the thread to discuss whether the IRS rules are fair or not. (Heaven knows, there are enough of those on this seller forum and elsewhere, if you're so inclined.) I just want to share what I've recently learned.

What I got from the IRS is that I am classified as a "hobby seller". Like my daughters who decided to open Etsy stores for their knitting and felted items. The IRS does not view any of us as a business, because we're not doing it "for income purposes". (Not true, but let's move on. Positive, remember.) Turns out that since 2018, "hobby sellers" cannot deduct any expenses on a Schedule C. They can only pay income taxes on the gross (whole) amount of money processed by the entity who handles that for them (Paypal Invoice, eBay, Etsy, Venmo, Zelle, et al). That includes the item's price plus the shipping charged to the buyer (sales tax should not be included, if the money handler is doing their business right). Let me repeat this: As a "hobby seller", the entire price that a buyer pays for an item (ITEM PRICE + SHIPPING) is counted as income to me for tax purposes. There is no deduction for fees or shipping charges paid out by me because of the sale.

The IRS said that, in order to qualify as an "unincorporated business seller" and not a "hobby seller", I would have to show that I made a profit on my sales for three of the last five years. (And if they allow me to be a "business seller", they see me as "self-employed", and I would then owe them an additional 15.3% per year on the whole amount for FICA (Social Security & Medicare taxes). Or I can become  a business by incorporating (big $$ for a casual seller, when combined with accountant's fees). TurboTax has made a nice page explaining this. Just search for "When the IRS Classifies Your Business as a Hobby" and look for the turbotax.intuit URL.

I'm taking the time to post this, not to feed the whining and recriminations found out there, but to clarify something that never seems to be mentioned in the threads I find. I see a lot of casual sellers like me asking this "gross amount" question, and the advice is always to get a Schedule C and start deducting the bookkeeping you've meticulously documented. That is not correct for most of the people I see who are asking! And absolutely no one explains about the 15.3% FICA tax that's mandatory for "self-employed hobby sellers" (remember, that's how the IRS will classify them, if they are allowed to file a Schedule C). Before anyone gets surprised at the end of the year (especially those of you on Social Security and SSDI), you really want to consider ending your listings and making an informed decision. If it's still a go for you after that, then you can just hit the relist button. But we're already well into the New Year, and there is no forgiveness period with the IRS.

Let me give you an example, and then you can do your own math for your listings. We're assuming (for the sake of the people I'm talking to here) that you take your mail to the PO to buy postage and use recycled packing from items that you've bought. If you decide to print your own labels, you save a bit and spend a bit, so it may or may not be worth it in the end. If you have to buy packing, you spend a lot. You're just selling stuff from around your house, so your investment is zero. (Remember, the IRS no longer allows deductions for "hobby sellers".)

I sell a number of items for $9 (I have two other selling IDs). They're small and lightweight so classify for USPS First Class postage. To provide eBay with a tracking number, I have to use FC Package Service. With the USPS rates that became effective today (09 Jan 2022), it costs $5 to ship 4oz. to the furthest point from me. That brings us to $14 for the buyer. Then we add their sales tax (averaging in the US, it's safest to use 8%), for another $1.12 that the buyer's paying. eBay Managed Payments deducts $2.20 for final value fees before sending the money to my bank. Shipping costs $5. So, let's do the math here on a few of my items:

$9 + 5 + 1.12 = $15.12 (buyer pays)

$-5 + -2.20 = $-7.20 (expenses)

I will net $7.92 on this $15.12 sale. I will pay income tax on $15.12.

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$225 + 24.89 + 19.99 = $269.88 (buyer pays)

$-34.17 (fees) + -24.89 (ship) + -160.00 (cost of item) + -5.00 (large box) = $-224.06

I will net $45.82 on this sale. I will pay income tax on $269.88. (Remember, even though I have the receipt for this one, a "hobby seller" is not allowed to deduct it anymore.)

++++++++++++++++

Now, assuming that I spent nothing on the item, didn't pay for packing or printing, didn't use extra gas to get to the PO, and the buyer doesn't return the item or ask me to combine shipping after they've paid, you can see that I will pay tax on about twice what I actually "made" on the small item. The large item . . . well, I bought that one before I knew about the "hobby seller" rule. If you did my math with me, you'll see that I get to take a loss of 83% of what I'll have to claim as income and am not allowed to deduct it. I receive 17% of that total sale but pay income tax on 100%.

Let's move on from "that's not fair" and "what a fool you are" and all those other nasty comments I see floating around on eBay (and the rest of the internet). I'm trying to help small sellers like myself to understand what's happening here, because the IRS is not going to accept "I had no idea" when you file those 2023 income tax returns.

I feel like a lot of people are going to be hurt, since they're getting wrong answers from big "business sellers" here on eBay. DO THE MATH on your own listings, and really figure out how this will play out for you. You can always call the IRS at 800-829-1040, and get it straight from the horse's mouth.

Hope this helps, and wishing you the best of success on whatever you decide to do!

[nobody*s_perfect]

Other posters have stated that "expenses" doesn't mean the original cost of the item, just the operating expenses like fees and shipping.

For 2022, the Standard Deduction for an individual is $12,950; double that for a couple filing jointly. So even if you report $12K from eBay, you won't owe any income tax on it.

Social Security recipients who have not yet reached full retirement age can earn up to $19,650 before SS starts deducting half of your earnings  from your check; above full retirement age, there is no limit.

[jayjaspersgarage]

"Social Security recipients who have not yet reached full retirement age can earn up to $19,650 before SS starts deducting half of your earnings  from your check; above full retirement age, there is no limit."

This is one of the most useful pieces of information posted here since the 1099K outrage began in October of 2021.

I plan to wait until last possible month to start collecting SSI.  The men in my family have to plan on living well into their nineties so we take the bonus money and start SSI at age 70ish.  That's 25 years receiving 124% of full benefits.

[nobody*s_perfect]

Congratulations on having good genes!  Here's the link to that info page, which also explains how they handle the calendar year during which you retire, and the year that you reach full retirement age.

https://www.ssa.gov/benefits/retirement/planner/whileworking.html

[dogchow747]

$9 + 5 + 1.12 = $15.12 (buyer pays)

$-5 + -2.20 = $-7.20 (expenses)

I will net $7.92 on this $15.12 sale. I will pay income tax on $15.12.

When you you are a business you get to breakdown the specifics of the $15.12

If not, it is assumed you made $15.12 until you say otherwise.

Not saying it is right, I did not make the rules.

[lloydsteventaylor]

Thanks for post. You need to talk to a CPA. You have the profit in 3 of 5 years correct. You have the self employment tax correct. But your ending analysis has a few missing pieces and doesn't apply to all small sellers here. Let's say I only sold 1 item on ebay in 2022. A bike I bought for $1000 and sold here for $700.  My 1099k is for $700. Can I deduct the $1000 I paid for the bike to offset my 1099k? You logic says no . You say add $700 to income. You need a CPA. 

[the-orange-cat]

Thanks for your answer. Actually, a CPA is who told me this. As a "hobby seller", I am not allowed to claim the $1,000. No expenses are allowed. Somehow, the IRS thinks that not having to pay the 15.3% FICA as a self-employed "business seller" is an offset for that (smile). This change just happened in 2018, so it came as a surprise to a number of us.

By the way, your 1099k is going to reflect shipping charges, too, in your hypothetical situation. Unless it was free shipping (which we all know is not possible--someone pays for it) or local pickup only, your tax form is going to include shipping charges, too.

If you can link to a CPA or IRS page that disputes this, I'd be glad to add it to the post. The accountant I spoke to may be misinformed. Information is my goal here (smile)!

[tryno2]

I'm sorry you and others are caught in this mess.  Really it's NOT a new mess, it's the same IRS requirements that have been around for years.  As for you specifically, you have 3 selling IDs.  On this id you presently have 7 items listed that will total over $1,100.  If the other ids are similar, you maybe aren't selling a lot of items but you are grossing a fair amount.  Enough that you would probably be ahead to be a business.  You say you've talked to an accountant, what did they suggest?  Whatever they said will be more in line with you personal situation then anything we could say.  

Based on what you've said, I assume you have not been paying taxes on the income from sales.  In which case all I can say is - best get right with the tax man.  Sorry folks if that statement makes me insensitive but I have no sympathy for anyone who doesn't pay their taxes.  

[luckythewinner]

The IRS said that, in order to qualify as an "unincorporated business seller" and not a "hobby seller", I would have to show that I made a profit on my sales for three of the last five years.

The "3 of 5" rule says that if you make a profit for 3 or the last 5 years, you are assumed to have a profit motive. 

But the rule does not state the opposite. The rule does not say that failing to make a profit for 3 or the last 5 years means that you do not have a profit motive. 

https://www.irs.gov/pub/irs-utl/irc183activitiesnotengagedinforprofit.pdf

Having a profit motive is only one of NINE considerations used to determine of you are a business or a hobby. 

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

[the-orange-cat]

I started my OP with "let's not get personal".  But I'll go here with you for a minute, because I know that my first post was so long that a lot of people probably wouldn't finish it. I was clear that we weren't talking about my selling practices but trying to help others by using my listings as math examples. For what it's worth, I've never grossed anything even near $600 per year before this. And two of my IDs are 20+ years old and only used for buying most of the time. I'm just trying to clear out my house this winter, and that's how I learned about what's coming. If you'd read the entire post, you'd know I already addressed the requirements for the IRS to recognize someone like me as a "business seller", and I come nowhere close. In fact, I've never made a profit on here, what with my small selling amounts, let alone "three out of the last five years" (IRS verbage).

No one was asking for the sympathy you say you don't have. But maybe someone else reading this needs to get away from snarky comments and get some direction for their own decision making. That's why I included the IRS toll-free number and explanation page on Turbotax. Hope this helps, and please don't make assumptions about anyone else who replies to this and really doesn't understand. It's a lot to digest, if this is your first year of having to deal with this. I'm sure there are a lot of confused sellers (or potential sellers) who are dismayed by all this. Let's not make it any worse for them.

[dq3141]

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@luckythewinner wrote:

The IRS said that, in order to qualify as an "unincorporated business seller" and not a "hobby seller", I would have to show that I made a profit on my sales for three of the last five years.

The "3 of 5" rule says that if you make a profit for 3 or the last 5 years, you are assumed to have a profit motive. 

But the rule does not state the opposite. The rule does not say that failing to make a profit for 3 or the last 5 years means that you do not have a profit motive. 

https://www.irs.gov/pub/irs-utl/irc183activitiesnotengagedinforprofit.pdf

Having a profit motive is only one of NINE considerations used to determine of you are a business or a hobby. 

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

---

I fear that “3 of 5” will become another false “fact” that will be impossible to get rid of.

[the-orange-cat]

Thanks for the opportunity to post this. I should have included it in my OP. This is straight from the last link that the previous poster gave to the IRS website. Folks, this is DIRECTLY taken from the IRS website.

Here are nine things taxpayer must consider when determining if an activity is a hobby or a business:

• Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
   
• Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
   
• Whether they depend on income from the activity for their livelihood.
   
• Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
   
• Whether they change methods of operation to improve profitability.
   
• Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
   
• Whether the taxpayer was successful in making a profit in similar activities in the past.
   
• Whether the activity makes a profit in some years and how much profit it makes.
   
• Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

[bbravo65]

...this post is confusing me...

...how couldn't a hobby seller write-off any related business expenses if an income from conducting retail business was claimed...(and I just got-off the phone with my tax accountant to verify this information)

...it's up to the IRS for that decision...as a citizen and taxpayer, everyone must report and filing complete income tax regardless business or hobby...(even if one is now resides in another country, unless that one give up his/her USA citizenship)

[nobody*s_perfect]

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@bbravo65 wrote:....how couldn't a hobby seller write-off any related business expenses if an income from conducting retail business was claimed... 

...it's up to the IRS for that decision...as a citizen and taxpayer, everyone must report and filing complete income tax regardless business or hobby...( 

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The IRS publications seem to indicate that the tax filer must make a determination before filing as to whether they are a hobby or a business, since the reporting is different.  Hobby sellers don't use Schedule C: "If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21."

https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby

[gracieallen01]

Your post is very good, but you forgot to over-emphasize one very important point: 

"If a person has questions about their bookkeeping or responsibilities, CONTACT A PROFESSIONAL!"  

And, as you point out, even the IRS has an 800 Number (and will helpfully answer questions).