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!

[the-orange-cat]

Perhaps this will be a little easier to understand. And don't forget to CALL THE IRS at 800-829-1040, if you're still unsure.

 https://turbotax.intuit.com/tax-tips/self-employment-taxes/4-tax-tips-for-money-making-hobbies/L89qz... 

[the-orange-cat]

I'd like to add this ray of sunshine. And I'm going to use my daughters' Etsy store as the example. After getting help to understand what was ahead of us, it's definitely worth it for them to forge ahead with their store. Even as "hobby sellers", they will never gross more than $12,950 each (which is when you start paying income tax). And if they make the $4,300 mark, when they're required to file a tax return, it's no big deal. They still have to hit the $12,950 before they owe taxes. And IF they do that, then they'll pay the 10% income tax PLUS the 15.3% FICA tax on all $$ over that and still be ahead of the game. The only reason we were able to make that decision was because we did a lot of phoning and research. My purpose for posting this was to soothe the frazzled nerves of non-business sellers who didn't know that the IRS is ready to help you understand what's going on. Whether we like it or not, "this is the way" (that's for all you Mandalorian fans out there). Sometimes you have to look for a new direction, but sometimes you just keep plodding along and weather the storm. You'll never be at peace with either decision, unless you get answers. And sympathy is not what anyone needs -- it's ANSWERS! Between us all, maybe we can bring a bit of peace to the lives of confused people we don't even know. And how cool is that?!

(P.S. Having been on here since the second year of eBay, I can honestly say that people have whined, badgered other posters, and threatened to leave over every single change ever made on here. In fact, it's funny. A lot of people complain about wanting it back the way it was last week or last year. Ha! Last year, they were complaining that that way of doing things was ruining them. And the year before that, they complained about the way things were working then. Etc ad nauseum. Try to ignore the complainers. They've been with us since the beginning, and they never actually go away. Today's policies will look great compared to what's coming. When the game changes, you just have to learn the new rules.)

[gracieallen01]

Well, considering anybody who asks for legal or financial help on a forum is going to get answers both yea and nay, they should probably just cut to the chase and get professional in-person help and information. 

Just my 2 cents worth, anyway.

[bashort]

o you sell $600 and you get a 1099 and it is added onto you income and you pay taxes on it except:

Ebay fees are deductible

shipping costs are deductible

internet service, deductible 

office supplies, deductible

new computer, deductible

phone service, deductible

new phone, deductible

mileage to the post office, deductible

mileage sourcing the items deductible 

house office space, deductible including some of the electric, gas, and water

smaller sellers should not have a problem showing a loss on ebay sales

[gracieallen01]

It seems that the IRS may have some problems with people taking deductions on their taxes (other than donations and the like) if they aren't a business AND don't make a profit (they aren't a business if they don't) once in a while.

[chapeau-noir]

A couple things:

If claiming office space and utilities, one needs to abide by very specific rules on that (space can't be used for anything else, for example), and that can be a red flag, so one needs to be very clear and specific on this (not discouraging using the deduction, just be precise is all).

Basic bookwork for filing a schedule C should not take an expensive CPA.  It might be a good shortcut to consult a tax professional, but if one has a pretty simple setup and just needs information, there is a lot of reliable help just online (just be careful in selecting information - Taxjar is one good site), including the IRS Small Business and Self-Employed Tax Center. 

[lacemaker3]

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@the-orange-cat wrote:

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.

...

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@the-orange-cat , this is correct -- for HOBBY sellers. (But, I think your CPA should have explained what you need to do to stop being a hobby seller.)

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Most miscellaneous deductions are not allowed anymore on the Schedule 1 (Form 1040), including the things a hobby seller used to be able to deduct there. IIRC, the only thing that is still allowed is for teachers who purchase books or supplies for their classroom (which obviously doesn't apply for eBay sellers).

But you don't have to be a hobby seller.

When someone advises a small seller to file a schedule C as a business, there is an implication that the small seller needs to take action so that they will qualify to file as a business. Whether that is explicitly stated or not.

Just because you have been a hobby seller, you don't have to continue to be a hobby seller. You can change that. You posted the 9 things that the IRS considers when deciding if you are a business seller or not. You don't have to meet all of them, and the IRS says that none of them are more important than any others. If you can meet MOST of them, then you have a good case for being considered to be running a business.

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

For most small eBay sellers, they can qualify as business sellers if they make decisions and take actions that will improve their chances of making a profit. That's where most eBay sellers don't qualify. They do things that don't improve their chances of making a profit.

In the last few years, the IRS has been recognizing that Gig Workers are now an important part of the economy, and are looking carefully at Gig Workers. The IRS makes a default assumption, that anyone who is selling things online, is a Gig Worker. There's a link on the first page of the Schedule C instructions to this IRS site:

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

https://www.irs.gov/businesses/small-businesses-self-employed/manage-taxes-for-your-gig-work

Gig workers can file as businesses, as long as they qualify to do so. If they don't qualify as a business, then the IRS says they have to file as a hobby instead. Either way, the IRS says they have to report all the income they received for their gig work, whether they received a 1099-K or not (see the link above).

eBay sellers who follow the instructions in the "What to Do" section on the IRS website linked above, should be able to qualify as a business and use the Schedule C, is it advises there.

[wildpitchsports]

Or you could just pull the plug and donate locally or donate to your local landfill. 

[loco4locos]

Thank you sooo much for taking the time to provide this very helpful information to us all. I'm sure that after careful consideration of these facts many small sellers like myself will simply stop selling.  In the past I have sold just for fun and RARELY made a profit ( it's just been a "keeping busy hobby" ) so now it's just not worth the hassle having to deal with the IRS.  I'd like to know at some future time how many small "hobby" sellers like myself have quit selling online altogether. Thanks again, you have done us all a great service!!!!

[wildpitchsports]

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@loco4locos wrote:

 I'm sure that after careful consideration of these facts many small sellers like myself will simply stop selling. I'd like to know at some future time how many small "hobby" sellers like myself have quit selling online altogether. 

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Best advice of the new year.

[loco4locos]

They'll find a way to tax us for that also!

[the-orange-cat]

You're welcome. I'm hoping to help people make an informed decision, that's all. For many people, turning a little side-selling (kinda like an online yard sale) into something that qualifies with the IRS as a business is clearly not going to happen. Actually, because of what I tend to buy, I buy from a LOT of older people (and I say that loosely, as I'm really no spring chicken) who sometimes don't know how to print a label. I'm grateful for their presence here, though, because I get a lot of things for my home that I can't find out here in the boondocks (smile). That said, I'm so afraid that January 2023 is going to find a lot of dazed and upset people (with tax bills they can't pay) who didn't know about this change. I'd rather they stop selling until they can figure out how this is going to affect them and actually make a decision to continue or not. A real decision, not just left to flounder around later. I know I'll have to be done, just as soon as my last few things are gone. No sour grapes. It's just the way it is. I'll miss it, because I like eBay. And without the sales, the buying power is gone, too. Ah, well. Bet I'll find something else to do with all the free time (smile). And we'll just have to be content with the things we already have. Not bad, eh?!

[iart]

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"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."

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 I offered an incorrect answer. Apologies.

[dq3141]

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@the-orange-cat wrote:

I'd like to add this ray of sunshine. And I'm going to use my daughters' Etsy store as the example. After getting help to understand what was ahead of us, it's definitely worth it for them to forge ahead with their store. Even as "hobby sellers", they will never gross more than $12,950 each (which is when you start paying income tax). And if they make the $4,300 mark, when they're required to file a tax return, it's no big deal. They still have to hit the $12,950 before they owe taxes. And IF they do that, then they'll pay the 10% income tax PLUS the 15.3% FICA tax on all $$ over that and still be ahead of the game. The only reason we were able to make that decision was because we did a lot of phoning and research. My purpose for posting this was to soothe the frazzled nerves of non-business sellers who didn't know that the IRS is ready to help you understand what's going on. Whether we like it or not, "this is the way" (that's for all you Mandalorian fans out there). Sometimes you have to look for a new direction, but sometimes you just keep plodding along and weather the storm. You'll never be at peace with either decision, unless you get answers. And sympathy is not what anyone needs -- it's ANSWERS! Between us all, maybe we can bring a bit of peace to the lives of confused people we don't even know. And how cool is that?!

(P.S. Having been on here since the second year of eBay, I can honestly say that people have whined, badgered other posters, and threatened to leave over every single change ever made on here. In fact, it's funny. A lot of people complain about wanting it back the way it was last week or last year. Ha! Last year, they were complaining that that way of doing things was ruining them. And the year before that, they complained about the way things were working then. Etc ad nauseum. Try to ignore the complainers. They've been with us since the beginning, and they never actually go away. Today's policies will look great compared to what's coming. When the game changes, you just have to learn the new rules.)

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Is your daughter a dependent who you claim on your taxes? Is she an adult who has other income besides her Etsy store?

[lacemaker3]

@the-orange-cat, I don't get it.

Why are you so determined that you can only be a hobby seller, and therefore you will have to stop selling?

Why can't you consider the possibility that there might be a better way to go about this? A different way of managing your sales, that would allow you to continue selling, if that's what you really want to do?

You're taking a very one-sided, biased viewpoint. Maybe  this is the only way for you, but if so, I think you should be honest to yourself, and admit that you just don't want to sell things anymore. If you wanted to continue doing this, then you would be open to figuring out how you can continue.