Short answer
Online sellers usually owe because nothing is withheld from marketplace payouts and self-employment tax comes on top of income tax. Your Form 1099-K shows gross payments, not profit, so fees, refunds and the cost of goods you sold come off on Schedule C. Report all sales, keep inventory records, and set up a payment plan for what you can’t pay.
Key takeaways
- IRS.gov says a marketplace or payment app reports to the IRS when gross payments for goods or services exceed $20,000 and there are more than 200 transactions, but all business sales income is taxable whether or not you get a form.
- The 1099-K amount is not adjusted for fees, refunds, shipping or discounts; you subtract those on your return.
- Inventory you bought but have not sold is generally not deductible yet; cost of goods sold is figured on Schedule C, lines 35 to 42.
- Selling your own used items at a loss is not taxable income, but you may need to show it on your return so the IRS does not tax the gross amount.
- Sales tax is a state matter and separate from your IRS balance.
Why online sellers end up owing the IRS
Marketplaces send you payouts, not paychecks, so no income tax is withheld. If you sell as a business, you are a sole proprietor unless you have formed an entity, and two taxes arrive at filing time: income tax on your profit and self-employment tax of 15.3% (IRS.gov, 2026) (12.4% Social Security plus 2.9% Medicare) once net earnings reach $400. Three things make the bill bigger than sellers expect:
- Money reinvested in stock. Cash spent on inventory that is still on the shelf at year end generally does not reduce this year’s profit, even though it is gone from your account.
- No estimated payments. The IRS expects quarterly estimates if you expect to owe $1,000 (IRS.gov, 2026) or more when you file.
- A mismatch notice later. Every Form 1099-K also goes to the IRS. If your return does not account for it, a proposed bill follows.
The general self-employment picture is in our 1099 tax bill guide, and app-based work is covered in the gig workers guide. This page covers what is specific to selling goods online.
Form 1099-K: what the threshold is and what the form means
The rules have changed several times since 2021. This is what IRS.gov says today:
| Rule | What the IRS says |
|---|---|
| Marketplaces and payment apps (third-party settlement organizations) | Report when gross payments for goods or services exceed $20,000 and there are more than 200 transactions for a payee. The One, Big, Beautiful Bill retroactively reinstated this pre-2021 threshold. |
| Payment card transactions | No threshold; even a small amount can produce a form |
| State rules | Your state may set a lower threshold, and a platform may send a form below the federal threshold |
| Taxability | Whether or not you receive a Form 1099-K, you must still report the income |
Three rules matter more than the threshold:
- The amount is gross. The IRS says it “isn’t adjusted for” fees, credits, refunds, shipping, cash equivalents or discounts, and that you can deduct those items from the gross amount. Business sellers report on Schedule C.
- Personal items are different. If you sold your own used things for less than you paid, the IRS says the loss “can’t be deducted,” but you can report the payment on Schedule 1 (or the sale on Form 8949) so you are not taxed on it. A profit on a personal item is taxable.
- Wrong forms are fixed by the issuer. Contact the filer named on the form for a correction. The IRS says: “Don’t contact the IRS. We can’t correct your Form 1099-K.” Don’t delay filing while you wait.
Marketplaces ask for your taxpayer ID for a reason. Publication 1281 lists Form 1099-K payments among those subject to backup withholding at 24 percent if you do not provide a correct ID. Amounts withheld this way are treated as withheld income tax (IRC 3406(h)(10)), so they count as a payment on your return, but it is far better to give the platform a correct ID than to have a quarter of your payouts held back.
Inventory and cost of goods sold
For a reseller, cost of goods sold is usually the biggest deduction, and the easiest one to get wrong. Publication 334 (for 2025 returns) sets the framework:
- The basic rule. If you buy and sell merchandise, you generally must keep an inventory and use an accrual method for purchases and sales.
- The small business exception. If your average annual gross receipts for the 3 prior tax years are $31 million or less (the 2025 figure, indexed) and you are not a tax shelter, you can choose not to keep an inventory. You can then treat inventory as non-incidental materials and supplies or follow your financial accounting treatment.
- Either way, timing matters. Under the materials-and-supplies method, inventory is deducted in the year you provide it to customers, so stock still unsold at year end is not deducted yet.
- How it is figured. On Schedule C, lines 35 to 42: beginning inventory plus purchases (less items you took for personal use), labor, materials and other costs, minus ending inventory. Your ending inventory becomes next year’s beginning inventory.
Other common seller costs, such as platform and payment fees, shipping, packaging and software, are ordinary business expenses on Schedule C. If the IRS ever questions whether your selling is a business at all, see hobby loss audits.
Sales tax is a separate, state-level issue
Sales tax is set and collected by states and localities, not the IRS. Many marketplaces collect it for sellers under state rules, but who must collect, register and file varies by state. We do not advise on state sales tax; check with your state tax agency or a preparer who handles it. For federal income tax, follow the treatment in Publication 334 and keep platform reports that separate sales tax collected from your sales, so the two are not mixed up on Schedule C.
When the IRS matches your 1099-K to your return
If the income on your return does not match the forms the IRS received, you may get a CP2000. It is a proposal, not a bill. Reply by the date on the notice. If the IRS has taxed the gross 1099-K figure without your refunds, fees and cost of goods sold, disagree in writing and attach the platform’s annual report, your inventory records and purchase receipts. If you sold personal items at a loss, show what you paid for them. Our guide to disputing an IRS balance walks through the response, and audits of cash businesses explains how the IRS reconciles 1099-K and deposit data in an exam.
If you agree and owe, the assessed balance turns into a bill such as a CP14, and the normal collection steps begin.
Can the IRS levy your marketplace payouts?
Only after the required notices. The IRS must send a bill and then a final notice of intent to levy at least 30 days before levying, usually an LT11 or Letter 1058; a CP504 comes earlier. You have 30 days (IRS.gov, 2026) from the final notice to request a Collection Due Process hearing.
- Money held for you. IRS levy authority reaches property and rights to property, including money a third party owes you, and a levy generally reaches only what is owed when it is served (IRC 6331(a) and (b)). The IRS has not published guidance specific to marketplace balances; how it levies money owed to self-employed people is covered in IRS levies on 1099 income.
- Your bank account. Payouts land in a bank account, where a bank levy can catch them; the bank holds the funds 21 days (IRS.gov, 2026) before sending them. If that has happened, read IRS froze your bank account.
A pending installment agreement request generally blocks a levy while it is under review (IRC 6331(k)), so apply before the final notice deadline.
Paying the bill, with an example
Most sellers with a one-year balance can use the IRS Online Payment Agreement: a short-term plan of up to 180 days (IRS.gov, 2026) with a $0 (IRS.gov, 2026) setup fee, or a Simple Payment Plan (formerly the streamlined installment agreement) for individuals owing $50,000 (IRS.gov, July 2026) or less, paid by the CSED (IRS.gov, July 2026), with a $29 (IRS.gov, 2026) setup fee for direct debit applied online. While a plan runs, the failure-to-pay penalty drops to 0.25% (IRS.gov, 2026) a month if you filed on time, and interest continues at the federal short-term rate plus 3 percentage points, reset quarterly (7% (IRS.gov, Jul-Dec 2026) this quarter). Larger balances are covered in relief by balance size.
Net profit: $64,000 – $3,000 – $9,000 – $27,000 – $2,000 = $23,000.
Self-employment tax: $23,000 x 92.35% = $21,240.50, and $21,240.50 x 15.3% = $3,249.80, before income tax.
Had Priya deducted all $30,000 of purchases instead of the cost of what she sold, her profit would have been understated by $3,000, the growth in unsold stock. Had she reported nothing, a CP2000 could have proposed tax on the full $64,000.
Records to gather and your next step
- IRS notices, with the date of any final notice.
- Every Form 1099-K and each platform’s annual sales and fee report.
- Inventory records: purchase receipts, a year-end count and what you paid for what you sold.
- Expense proof: shipping, packaging, software and storage.
- Personal-item sales: what you originally paid, for anything you sold that was not bought for resale.
A one-year balance under the Simple Payment Plan limit is usually a do-it-yourself fix online. Free help is available from the Taxpayer Advocate Service (877-777-4778 (IRS.gov, 2026)) and Low Income Taxpayer Clinics. Help is more likely to pay for itself if several years are unfiled, a CP2000 taxes your gross sales, or a levy has started; see do you need a tax professional. Global Gate Tax Relief offers a free case review and handles federal IRS matters only, not state sales tax; if an online plan will solve it, we will tell you.
Frequently asked questions
IRS.gov says marketplaces and payment apps report when gross payments for goods or services exceed $20,000 and there are more than 200 transactions. Payment card transactions have no threshold, and states may set lower ones. Either way, all business sales income must be reported.
No. The IRS says the gross amount is not adjusted for fees, refunds, shipping or discounts, and you can deduct those. Business sellers also subtract cost of goods sold and other expenses on Schedule C, and pay tax on the profit.
Not if you sold them for less than you paid. The IRS says that loss can’t be deducted, but you can report the payment on Schedule 1 or the sale on Form 8949 so it is not taxed. If you sold a personal item for more than you paid, the gain is taxable.
Generally not. Cost of goods sold counts what you sold during the year: beginning inventory plus purchases, minus ending inventory. Small business taxpayers who skip formal inventories and treat stock as materials and supplies still deduct it in the year it goes to customers.
No. Sales tax is a state and local tax. Many marketplaces collect it under state rules, but registration and filing duties vary by state. Ask your state tax agency or a preparer who handles sales tax.
After the required notices, the IRS can levy money third parties owe you, and payouts that reach your bank account can be caught by a bank levy. The IRS has not published guidance specific to marketplace balances. A payment plan request made before the final notice deadline generally blocks levies.
Sources
- IRS: Form 1099-K FAQs, general information (reviewed 3 Apr 2026)
- IRS: What to do with Form 1099-K (reviewed 27 Jul 2026)
- IRS: Understanding your Form 1099-K
- IRS Publication 334 (2025), Tax Guide for Small Business
- IRS Publication 1281 (Rev. 12-2023), Backup Withholding for Missing and Incorrect Name/TIN(s)
- 26 U.S.C. 3406, Backup withholding
- IRS: Self-employment tax
- IRS: Estimated taxes
- IRS: Understanding your CP2000 notice
- IRS: What is a levy?
- 26 U.S.C. 6331, Levy and distraint
- IRS: Simple payment plans for individuals and businesses
We check every figure against IRS.gov and log changes on the key figures page.
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This page is general information about IRS rules, not tax or legal advice for your situation. IRS figures change; each one links to its official source and the date we last checked it.