1099 forms and HOW to File with the IRS

[vukovar]

I have a few questions regarding the 1099. I sold a few thousand dollars worth of collectibles as a collector (I'm not incorporated as a business). I received a 1099 for the first time because I sold very little before, always at a loss after eBay fees and shipping costs. This year I made a small profit (10-15% or so) from my costs (including the cost of my collectibles). The 1099 includes the entire amount, of course, not my actual profit. I'm fine with paying owed taxes but HOW and WHERE do I file them with the IRS? Do I have to report the entire gross receipts as income? Do I report just the profits? If so, on what part of the tax form(s)? The posts I've found just chastise people for complaining but wait until next year when every platform will be reporting 1099's to the IRS of anything over $600. You thought filing was hard before, just wait until 2022 tax filers have to deal with all these electronic transactions. 

[monica-sells]

don't be intimidated by all the 'forms'

just add the schedule c to determine your 'taxable income'

that is where you list 'gross sales', costs of goods, then all you selling expenses...

you will get a final number that you ransfer to your 1040 from schedule C

There are a few good threads explaining the basics, but it is always recommended to get professional advice

(or at least a software program to assist you)

[caldreamer]

1099 is sent to you and the IRS.   1099 shows gross sales (purchase price + shipping income).   You must report amount shown on 1099.

If you claim as "hobby seller" you have to pay income taxes based on "entire amount" shown on 1099.    If you file as business you can claim deductions (EBAY fees, costs of goods, mileage, costs of shipping items, packing materials).  Depending on what state/city you live in...they may require you to get a business license.

Filing business taxes can be very difficult (if you have never done it before).   I strongly urge you to contact a tax accountant.   They can also guide in what bookkeeping is required and receipts to be kept.

[nobody*s_perfect]

Probably you should file a Schedule C. Read that form and its instructions. You start with the gross as reported on your 1099-K, then take deductions for expenses such as eBay fees, postage ,and original purchase price. Depending on the bottom line on Schedule C, you might have to also file Schedule SE; the Schedule C itself will make that clear.

[dnasilver]

He clearly said he was not a business. Why would he file schedule C?

[dnasilver]

It really is not that hard once you know the direction to go. Without knowing about your finances no one can give you advice on what is the best for you and limiting any taxes due. Do a consult with a CPA, bring your stuff and know what your future intentions are. You need to know if you want this to be filed as earned income or unearned income. Business income or Investment income or is it just hobby income (not advisable since the last administration removed hobby deductions). You have to look at all the ways you are making money and come up with a legal tax plan that will keep all taxes to a minimum. That is what a CPA can do for you. Tell you if you want to have earned income requiring paying FICA taxes or unearned income which does not pay FICA taxes. We have a feeling many will regret filing schedules related to earned income and never paid FICA taxes quarterly. Hire a CPA, the one-time cost 200 to 600 bucks depending on your financial situation will be well worth in the long run, since once audited you are always at the top of the flagpole to be audited again.

[nobody*s_perfect]

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@dnasilver wrote:

He clearly said he was not a business. Why would he file schedule C?

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He said he wasn't incorporated as a business, but it looks like he falls into the IRS's definition of a business, rather than  hobby:

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

[dbfolks166mt]

     Personal opinions on whether the OP or any other seller is running a business or not mean nothing it's what the IRS categorizes you as. The one thing that is certain is the 1099 has to be reported somewhere on the individual's taxes. There are a number of ways to do this and a tax professional could best advise which way is the best based on individual situations. 

     A schedule C is the most common even though a lot of sellers would profess not to be a business. After the IRS gets hit with the highly probable deluge of additional schedule C's next year it would not surprise me if the IRS did not come up with a new tax form that is more geared to those who are not exactly a hobby seller but are not a exactly a business either. They may in fact already be working on this but who knows for sure. 

[coolections]

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@dbfolks166mt wrote:

 After the IRS gets hit with the highly probable deluge of additional schedule C's next year it would not surprise me if the IRS did not come up with a new tax form. 

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I wonder if that was the intention all along. Biden can then take credit for creating 10 million new businesses and try running again under that premise. I would think that every online seller will file as a business, it would be crazy not to.

[lepke1979]

You don't need to be incorporated to be a business. Nothing wrong being a sole proprietor. A lot of people are. Do it and take advantage of the deductions.

[dbfolks166mt]

     Agree with filing as a business. Actually if you can show a loss that loss can be used to reduce your overall tax liability. For a lot of sellers this is a definite possibility and perfectly acceptable under current IRS laws. Of course there are limits to how long you can do that before the IRS will reclassify you. 

     As far behind as the IRS is I am not sure they could even pull the stats together in the 18-20 months before the election. I am not sure if Biden will run again even if the Democrats wanted him to. He will be 82 by the time the election rolls around and 86 if he made it through a complete second term. Biden was already the oldest president (78) ever elected. That is not to say the party will not take credit for it provided they retain control after the mid-terms. 

     Being president seems to accelerate the aging process. A couple of before taking office and when leaving it examples. Makeup can only hide so much. 

[mega-ma-roo]

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@caldreamer wrote:

If you claim as "hobby seller" you have to pay income taxes based on "entire amount" shown on 1099.   

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This is not correct. Cost of goods sold can be used to offset not for profit income from sale of items.

[lacemaker3]

@vukovar 

There are 3 basic ways that eBay sellers can use to report their income for taxes. You will have to figure out which method you want to use to report the gross receipts, based on your own situation. 

From what you have said, you would be in situation 1, as outlined below, Selling items you purchased for your own use or collections. You would report the income as a capital gain or loss.

Most eBay sellers prefer to file as a business (situation 2), because the tax treatment is better, but if you don't feel that you are running a business, then capital gains/losses is the way to go. Filing as a "hobby seller" (situation 3) is not really a good choice, for most people. (I can't think of a situation when this would be advisable, actually.)

The IRS, as a default position, considers Online Sellers to be Gig Workers. If you have enough earnings that you are required to file a tax return, then you are required to report all income you received for the gig work, whether the income was reported on a 1099 form or not (for example, if the income was below the threshold, or was from barter or exchange, rather than currency payments).

https://www.irs.gov/businesses/gig-economy-tax-center

Basically, there are three possible situations that eBay sellers may be in; the last two are Gig Workers, and the first one is not, and is for people selling capital assets. 

1. Selling items you purchased for your own use or collections, or inherited, when you are not operating a business activity.
   • If you selling your own personal possessions or investments, you can treat them as capital assets, and file Schedule D (Form 1040), Capital Gains and Losses.
   • You can deduct the cost-of-goods-sold from the gross amount you received for the items, to determine if they were a net capital loss or gain.
   • Ideally you would have receipts or records to document the cost basis of the items, for the cost-of-goods-sold:
     • However, if the items were inherited then you need to use the fair market value on the date they were inherited.
     • If you don't have receipts (as for items that were bartered or exchanged, or if receipts are not available) then you can use the fair market value when they were acquired.
     • The fair market value needs to be determined consistently, and according to accounting principles.
     • For more information, see IRS Publication 551, Basis of Assets.
   • Your net income from the sale of capital assets, is your gross income, minus the cost-of-goods-sold as shown on Schedule D. If this produces a net loss, then there is no tax liability (tax owing) on the sales.
   • If you have a net capital loss, then you may be able to report the net loss, up to certain limits, and depending on the type of items that were sold and how long you owned them. See the IRS instructions or consult a tax expert for details.
     
     
2. Acting as a business: If you were selling things that you purchased to resell, and/or if you were selling the items intending to act as a business and make a profit (even if they were originally your personal possessions), then you may qualify to file as a business.
   
   • Here are the guidelines that the IRS uses to determine if an online selling activity qualifies to act as a business:
     https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
   • You don't need to meet all of these points to qualify, and none of the points are more important than any others. For eBay sellers, perhaps the most important thing they need to do to qualify as a business, is to take actions and make decisions that will increase their chances of making a profit, and be able to demonstrate this if they are audited.
     • For example, look for good sources of inventory, and stop using sources that not profitable.
   • Businesses can file Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
   • You do not need to have an LLC, or a business license, or be registered as a business to use a Schedule C. You just need to qualify according to the IRS guidelines above.
   • You can use Schedule C to report your gross income from the business, and to deduct business expense. These can include:
     • The cost basis of your items sold as described above for capital gains or losses.
     • Other normal and customary business expenses. This can include eBay fees, shipping and packaging costs, rent for office space or inventory storage, etc. See the IRS instructions for details.
       
       
3. Not-for-profit activity:  If you are not filing a Schedule D Capital gains or losses, and if you don't qualify to file as a business (according the the IRS guidelines above), then your activity was considered to be a not for profit by activity the IRS.
   • If you don't qualify to file as a business, then you can't use the Schedule C. This will be the case for many eBay sellers who consider themselves to be "hobby sellers". The IRS considers them to be "gig workers" as described above.
   • In this case, according to the 2021 Instructions for Schedule C:
     • "To report income from a nonbusiness activity, see the instructions for Schedule 1 (Form 1040), line 8i. "
       See page 1: https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
   • You need to report your gross income from the not-for-profit activity on Schedule 1 line 8i as stated above.
     • You can calculate the gross income from the not-for-profit activity according to Publication 535, Business Expenses (section: Not for Profit Activities: Gross Income)
     • "You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting."
       See page 8: https://www.irs.gov/pub/irs-pdf/p535.pdf
   • If you use this method of determining gross income to report on Schedule 1 (Form 1040), line 8i, and the gross income is substantially less than the amount that was reported on your 1099-K, then it is possible that this may increase your chances of being audited.
     • If you are audited, you should expect to be asked to show how you determined your gross income. You should be able to demonstrate how you calculated your cost of goods sold, and subtracted that from your gross receipts.
     • As long as you calculated the cost of goods sold reasonably and fairly, including the actual cost or fair market value of the goods of sold, and any other expenses, and accurately calculated your gross income, this should be acceptable to the auditor.

[vukovar]

This is the clearest info I've received on this. Thank you. I would have gone with the capital gains route but my tax preparer (HR Block) said they were ordered to file under "acting as a business" and I'm fine with either way but they said to do it that way. Of course the IRS sees your 1099-K as ALL income if you go the business route although I have just sold things not really engaged in a business for profit and made very little (must less than the full amount on the 1099-K. But now, I'll need to send a letter to the IRS stating I sold goods and am claiming profit NOT that I cut lawns or drove Uber.

[vukovar]

Can't I also deduct base cost of goods sold?