The IRS is Cracking Down on Online Income: What You Need to Know

Last updated 01/28/2025 by

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Summary:

If you make money online, the IRS is paying closer attention. A lower 1099-K reporting threshold means more people will receive tax forms for online income. This article explains what income is taxable, how to avoid penalties, and how to stay compliant. If you have tax debt, there are programs available to help, including tax relief companies that can negotiate on your behalf.

If you earn money through platforms like eBay, Etsy, or PayPal, expect new tax reporting rules. The IRS is lowering the 1099-K reporting threshold, meaning millions of Americans will receive tax forms for online income they may not have reported in previous years.

The IRS is increasing scrutiny on online income

Previously, only those earning over $20,000 through online sales received a 1099-K. Now, the threshold is $5,000 for the 2023 tax year and will drop further to $2,500 in 2025 before reaching $600 in 2026. This change is part of an effort to close the tax gap and ensure all income is reported correctly.

Understanding these changes is crucial to avoid penalties and stay compliant with IRS regulations.

What online income is taxable?

Not all online sales are subject to taxes. Here’s how to determine whether you need to report income:

Personal sales at a loss: If you sell personal items (e.g., used electronics, furniture) for less than you originally paid, you won’t owe taxes. However, you may still receive a 1099-K and should keep records to prove the loss.
Profitable personal sales: If you sell an item for more than you paid, the profit is considered a capital gain and must be reported on Form 8949 and Schedule D.
Business income: If you sell goods or services as a business (including side hustles), all income is taxable and must be reported, even if you don’t receive a 1099-K.

How to avoid IRS penalties

With increased IRS enforcement, failing to report income can lead to fines, interest, and even audits. Here’s how to stay compliant:

1. Report all taxable income

Even if you don’t receive a 1099-K, you’re still required to report all earnings. Keep track of all sales and payments received through online platforms.

2. Keep detailed records

Maintain documentation of your sales, including purchase prices, receipts, and transaction records. This is especially important if you need to prove that a sale was at a loss.

3. Understand deductible expenses

If you operate a business, you may be able to deduct expenses such as shipping, supplies, and platform fees. Keeping accurate records of these expenses can reduce your taxable income.

4. Pay estimated taxes if necessary

If you earn significant self-employment income, consider making quarterly estimated tax payments to avoid underpayment penalties. The IRS provides guidelines for estimated payments on IRS.gov.

5. File on time and correctly

Ensure you file your tax return by the deadline. If you need more time, request an extension, but remember that an extension only gives you more time to file, not to pay.

What if you owe taxes? Options for tax relief

If you find yourself owing more taxes than you can afford, the IRS offers several relief programs:

Installment agreements:Allows you to pay your tax debt in monthly installments.
Offer in compromise: If you can’t afford to pay the full amount, the IRS may settle for a reduced payment.
Currently not collectible status: If you’re facing financial hardship, the IRS may temporarily suspend collections.

You can apply for these programs directly through the IRS or work with a tax relief company that can negotiate on your behalf. However, be cautious and research any company before hiring them to avoid scams.

A silver lining: Fewer 1099-NEC forms for subcontractors

While the new 1099-K reporting rules may create more paperwork for online sellers, there’s a potential benefit for business owners. If you pay subcontractors or freelancers via third-party payment processors like PayPal, Venmo, or Cash App, you may no longer need to file a 1099-NEC for those payments—even if they exceed $600.

That’s because payment platforms are now responsible for reporting those transactions via 1099-K instead. This shift can reduce your tax filing burden and simplify compliance. However, to avoid mistakes, consult a tax professional to ensure you’re meeting IRS requirements properly.

Frequently asked questions

What is a 1099-K form?

A 1099-K is a tax form issued by third-party payment processors (e.g., PayPal, Venmo, Etsy) that shows the total amount of payments you received during the year.

Do I owe taxes if I receive a 1099-K?

Not necessarily. If your sales were personal and at a loss, you likely don’t owe taxes, but you should still report the transactions and keep records.

What happens if I don’t report my online income?

Failure to report taxable income can result in penalties, interest, or an IRS audit.

Can I deduct expenses if I sell online?

Yes. If you’re running a business, you can deduct expenses like shipping costs, platform fees, and supplies.

How do I avoid an IRS audit?

Ensure accurate reporting, keep thorough records, and file on time to reduce audit risks.

Key takeaways

The IRS is lowering the 1099-K reporting threshold, requiring more people to report online income.
Not all online sales are taxable, but profits from personal sales and all business income must be reported.
To avoid penalties, report income accurately, keep records, and understand deductible expenses.
If you owe taxes, IRS relief programs and tax relief companies can help negotiate payments.

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