As of the writing of this article, it appears likely that the lowered 1099-K threshold of $600 in gross payment amount will go into effect for tax year 2023. This is causing much anxiety among small sellers, and with good reason.
To help illustrate how much confusion and complexity is about to be created for small online sellers, we did research to identify some pretty common scenarios sellers might encounter that make for very interesting 1099-Ks and tax returns.
For example:
Inconsistent Gross Amount calculations
1099-Ks have been around since 2011. But did you know that, after 12 years, different platforms are still using different calculations in terms of what gets included in the Box 1 amount? See several examples as we look at the treatment of sales tax.
Selling personal items among your business inventory
Do you track your personal sales separately from your business sales? Because eBay, Poshmark and others don’t. You get a single 1099-K for all sales on each platform. Yet what if you sold some personal items at a loss? Personal items don’t get treated the same as normal business sales. We took a deep dive into this scenario, to help walk sellers through what to do.
Consignment sales
As a reseller of someone else’s items, you may be collecting the full amount of the sale, which will be reported on your 1099-K. Except your income is really only the commission you receive from the sale. How are you supposed to account for this? Learn more as we share what we’ve uncovered.
Disclaimer
The content in this page should not be construed as legal or tax advice. Please consult an attorney or tax professional regarding your specific tax situation.
Don’t stress
Our intent in pulling these example together is not to increase fear or anxiety. We believe there is ample evidence that the entire situation is imperfect, and what the IRS cares the most about is that you pay the correct amount of tax that your business owes. With reasonable bookkeeping, it shouldn’t be too hard to handle these scenarios. At Seller Ledger, we pull in your detailed sales and expense information to make this as simple as possible. We also offer a 30-day free trial, no credit card required.
It is our belief that Congress does not fully understand the unnecessary complexity they have created, especially for small sellers. So, we encourage sellers to get involved and send a message to Congress. Click either of the buttons below to be taken to a place to make your voice heard:
As part of our efforts to further research interesting 1099-K scenarios, we wanted to explore a question that many resellers have recently asked about: consignment sales.
What are consignment sales?
A consignment sale happens when a reseller (called the consignee) helps another individual or business (called the consignor) sell some of their products for them. Usually, the owner of the products (consignor) compensates the reseller (consignee) by paying a percentage of the total sale, a flat fee, or some other negotiated rate.
Conceptually, this arrangement is pretty straightforward. The issue is: how does the accounting work? And where do 1099-Ks come into play?
Accounting for consignment sales – before 1099-Ks
Traditionally, the way to handle accounting of consignment sales is as follows:
The owner of the item (consignor) tracks the total sale as income, and treats the commission paid to the person selling it on their behalf (consignee) as an expense. The consignee just reports the commission amount as their income. In fact, if the consignor sends the consignee more than $600 in commission payments, there’s a good chance of them sending the consignee a 1099.
Why does the accounting normally work like this? Because ownership of the item (officially referred to as “title”) does not pass from the business to the reseller when consigned. The original owner still has “title” to the item until it sells, at which point it transfers to the buyer. So the sale gets recorded as a sale from the owner (consignor) to the end buyer, and the commission gets paid to the reseller (consignor.)
Let’s look at an example:
A local small business has an armoire, originally purchased for $100, that they would like to sell on consignment. They enlist a reseller, who agrees to sell the item in exchange for a 20% commission. That reseller successfully sells the armoire for $300. Ignoring things like shipping costs and fees, the resulting accounting entries would look this:
Owner/Consignor:
Product sales: $300
- Cost of Goods Sold: $100
- Commission: $60 (paid to Reseller/Consignee)
===========================
= Net profit: $140
Reseller/Consignee:
Commission income: $60 (received from Owner/Consignor)
===========================
Net profit: $60
This, however, raises an interesting question: if the consignee is collecting the money for the sale, how do they only report $60 of income?
Now you start to see why this is confusing in the world of eCommerce and 1099-Ks. We won’t get too far into the details (unless enough people ask,) but the key concept is that, as a consignee, when you collect the money from a consignment sale, that money doesn’t get counted as your revenue. It’s actually a liability. You owe it to the consignor (less any commission and agreed-upon costs) as soon as you collect it. Only the commission is income.
And herein lies the point of the article. If you are an eCommerce reseller doing consignment sales, the platform you are selling on knows nothing about consignment. They will send you a 1099-K that includes the total sales proceeds. In the above case, that would be the full $300.
So what should you do?
Accounting for consignment sales – matching 1099-Ks
Disclaimer
Before proceeding it’s important to mention that we at Seller Ledger are not tax experts and are not trying to provide tax advice. It is critical that you as a reader make your own decisions on how to handle your specific tax situation, which may include hiring a professional.
First, the fact that 1099-Ks from a platform like eBay do not exactly match your sales records is okay. The 1099-K is an informational form. The IRS knows that they it may not represent a business’s true income. Therefore, accurate bookkeeping is critical.
When the sale shows up from your online sales channel, you can go ahead and categorize it as product sales, and when you make your payment to the original owner/consignor for the net amount minus your commission, make sure to categorize that properly.
“Do not include merchandise you receive on consignment in your inventory. Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use.”
Mark Tew, of NotYourDadsCPA, suggests using “Commissions” in this video, which we think makes a lot of sense.
Using the same scenario as above, this would result in entries that look like this:
Reseller/Consignee:
Product sales: $300
- Commissions: $240 (paid to the Owner/Consignor)
===========================
= Net profit: $60
Owner/Consignor:
Product sales: $240 (received from Reseller/Consignee)
- Cost of Goods Sold: $100
===========================
= Net profit: $140
Note that each party’s net profit is still the same – the accounting entries are just a bit different. As a reseller, what matters most is that your bottom line profit accurately reflects the business that you did. And taking this approach will help your top-line numbers match the 1099-Ks that get reported for your business.
Simplify your bookkeeping
At Seller Ledger, we import the individual order details of everything you sell through your online sales channels, making it easy to spot those consignment sales and categorize the payouts to consignors properly. Once you have categorized an expense with a consignor, Seller Ledger’s software can remember this for you so all future sales expenses with that consignor can be treated the same way. Anyone is welcome to try Seller Ledger for 30 days, free of charge with no credit card required.
