If you’ve been selling handmade goods on Etsy, flipping items on eBay, freelancing and getting paid through PayPal, or accepting business payments via Venmo or Cash App, you may have already noticed that these platforms are paying closer attention to what flows through your account. That attention comes with a question that millions of Americans are asking: Do I actually have to report this money on my tax return?
The short answer is yes — and it’s important to understand exactly why, what the current reporting thresholds are, how the rules have shifted in recent years, and the consequences of not staying compliant. Whether you’re a Phoenix small business owner, an Arizonan running a weekend side hustle, or someone who occasionally sells personal items online, this guide breaks down everything you need to know about reporting income from payment apps and online marketplaces — and how to avoid a surprise tax bill.
The Core Rule That Never Changed
Before diving into Form 1099-K thresholds and recent legislative changes, there’s a foundational rule that often gets lost in all the noise: all income is taxable and required to be reported to the IRS, regardless of whether you receive a 1099 form. This has always been the law, and it hasn’t changed.
If you earn money selling goods or services — through Venmo, PayPal, Cash App, Etsy, eBay, Facebook Marketplace, Poshmark, Airbnb, Rover, Fiverr, or any other platform — that income is taxable and must be reported on your federal and Arizona state tax returns. The 1099-K form that platforms send is simply a reporting mechanism that puts the IRS on notice about what you earned. Not receiving a 1099-K does not mean the income is tax-exempt. It means the platform wasn’t required to generate that form for you, but your legal obligation to report the income exists independently of whether any form was issued.
This distinction matters enormously, and it’s the most important thing to understand about this entire topic. Thousands of Arizonans who sell items online, accept app-based payments for services, or run side hustles through digital platforms are under the mistaken impression that as long as they don’t receive a 1099, they don’t have to report anything. That impression is incorrect and can lead to significant tax liability, penalties, and interest if the IRS identifies unreported income.
What Is Form 1099-K and Who Sends It?
Form 1099-K is an informational tax form that payment settlement entities — including platforms like PayPal, Venmo, Cash App, Etsy, eBay, Stripe, Square, and others — are required to send to both the IRS and to users who meet certain transaction thresholds during the year. The form reports the gross amount of payments you received through the platform, and the IRS receives a copy directly from the platform at the same time you do.
When you file your tax return, and the IRS has a 1099-K on record for your Social Security number or Employer Identification Number, their system automatically cross-references what the platform reported with what you reported. If those numbers don’t match and you can’t account for the difference, it triggers correspondence, notices, and potentially an audit. The IRS has been clear and consistent on this point: “You cannot hide this, the IRS is aware you earned that money.”
The 1099-K covers payments received for goods and services transactions. It does not cover personal transfers between friends and family — splitting a dinner bill, reimbursing a friend for concert tickets, or sending money to a family member are not reportable transactions. The reporting obligation is triggered when these platforms are used to receive payment in exchange for something of commercial value.
The 1099-K Reporting Threshold: A Moving Target
The threshold at which platforms are required to send you a 1099-K has been one of the most confusing and frequently changing areas of tax law in recent years — and for good reason. The rules have shifted multiple times, creating real uncertainty for part-time sellers and gig workers.
Here’s how the threshold history has played out:
- For many years, the threshold was $20,000 in payments and at least 200 transactions in a calendar year — meaning only high-volume sellers received 1099-Ks from platforms
- The American Rescue Plan Act of 2021 lowered the threshold dramatically to $600 with no minimum transaction requirement, intended to take effect for the 2022 tax year
- The IRS delayed implementation of the $600 threshold multiple times due to widespread confusion among consumers, platforms, and preparers
- For the 2024 tax year, the IRS established a $5,000 transitional threshold — anyone receiving $5,000 or more in goods and services payments through a platform would receive a 1099-K
- For the 2025 tax year, the planned threshold was $2,500, with the $600 threshold scheduled to take full effect for 2026
- However, Congress stepped in through the One Big Beautiful Bill Act to reinstate the original $20,000 and 200 transaction threshold, rolling back the IRS’s planned reductions
As of this writing, the $20,000 and $ 200 transaction thresholds have been restored legislatively, meaning platforms like Venmo, PayPal, Cash App, and online marketplaces will issue 1099-Ks only to users who exceed those higher bars. This is a significant change from the planned trajectory toward the $600 threshold and provides more breathing room for smaller-scale sellers before a 1099-K is generated.
What this does not change — it’s worth repeating — is your underlying obligation to report all taxable income regardless of whether you receive a 1099-K.
What Counts as Taxable Income on These Platforms?
Not every dollar that flows through a payment app or online marketplace is taxable income, and understanding the distinction saves both money and confusion at tax time.
Income from selling goods or services — whether that’s handmade crafts on Etsy, freelance graphic design paid through PayPal, dog walking booked through an app, or consulting services billed through Stripe — is taxable business income. It gets reported on Schedule C of your federal return and flows into your Arizona taxable income. If you’re self-employed and earning through these platforms, you also owe self-employment tax on those net earnings, which covers both the employee and employer portions of Social Security and Medicare.
The taxable amount, however, is not always the gross amount shown on your 1099-K. For sellers of physical goods, what matters is profit — the difference between what you received and what you paid for the item, plus any legitimate selling costs. If you bought a piece of furniture for $400 and sold it on Facebook Marketplace for $300, you didn’t make a profit — you took a loss on a personal item, and that sale is not taxable income. You don’t owe tax on money you lost. The tax code taxes gains, not gross receipts.
For this reason, keeping records of your original purchase prices — also called cost basis — is critical for anyone regularly selling items through online platforms. Without documentation of what you paid, you cannot demonstrate to the IRS that a sale resulted in no taxable gain, and the default assumption becomes that the entire gross receipt is income.
Transactions that are explicitly not taxable include:
- Personal reimbursements between friends and family for shared expenses, gifts, or non-commercial exchanges
- Selling personal property at a loss relative to your original purchase price
- Money received as a gift through a payment app
- Transfers between your own accounts
Platform-by-Platform Breakdown: What Each One Reports
PayPal and Venmo
Both PayPal and Venmo — which are owned by the same parent company — distinguish between personal payments and payments for goods and services in their systems. Personal payments between friends are not reported. When you toggle a payment to “goods and services,” however, PayPal and Venmo treat it as a commercial transaction subject to 1099-K reporting thresholds. Business owners using these platforms should use the goods-and-services designation for all commercial transactions and keep their personal and business use of these apps completely separate.
Cash App
Cash App similarly tracks transactions designated as business payments separately from personal transfers. Cash App for Business accounts are subject to the same 1099-K reporting framework as other platforms. If you’re accepting business payments through Cash App’s personal interface without the business designation, you may still have a reporting obligation even if Cash App doesn’t generate a 1099-K, because the income itself remains taxable.
Etsy
Etsy operates as a marketplace for goods and services, and all seller payments through the platform are commercial in nature — there’s no personal payment category on Etsy. Etsy issues 1099-K forms to sellers who meet the applicable threshold and reports those transactions directly to the IRS. Etsy sellers who are below the 1099-K threshold still have a taxable income obligation on their net sales.
eBay
eBay follows the same framework as Etsy. Sales of personal items at a loss are not taxable, but any sale that results in a gain above your original purchase price generates taxable income. Regular eBay sellers who buy and resell items for profit are operating a business from the IRS’s perspective, regardless of whether they think of it that way. That income needs to be reported as business income on Schedule C.
Zelle
Zelle is the notable exception to the 1099-K reporting framework. Because Zelle processes bank-to-bank transfers rather than holding funds in a digital wallet, it is currently exempt from the 1099-K reporting requirement. However — and this is critically important — the exemption from 1099-K reporting does not exempt Zelle income from taxation. If you receive payment through Zelle for business services or goods, that income is taxable and must be reported, even though Zelle will not issue you a 1099-K, and the IRS does not receive a direct data feed from the platform. The absence of a form is not the absence of an obligation.
The Arizona State Tax Angle
For Arizona residents, income reported on a federal Schedule C — which includes gig income, side hustle revenue, Etsy and eBay sales, and freelance payments through apps — flows through to your Arizona taxable income at the state’s flat 2.5% rate. Arizona generally conforms to federal income tax definitions, meaning that if the income is taxable at the federal level, it’s taxable at the state level as well.
Arizona also requires individuals with significant self-employment income to make quarterly estimated tax payments to the Arizona Department of Revenue, separate from federal estimated payments. Arizonans who earn meaningful income through these platforms and do not make quarterly estimated payments risk both an underpayment penalty from the ADOR and a year-end state tax bill they weren’t prepared for.
Deductions That Reduce Your Taxable Platform Income
If you’re reporting income from selling goods or providing services through these platforms as business income, you’re entitled to deduct the legitimate business expenses associated with generating that income. This is one of the most significant financial advantages of proper reporting — and it’s an advantage that only exists when you’re keeping clean records.
Deductible expenses for platform-based businesses commonly include:
- Cost of goods sold — what you paid for items you resold
- Materials and supplies for creating products sold on Etsy or similar platforms
- Shipping costs and packaging materials
- Platform fees charged by Etsy, eBay, PayPal, and others
- Home office deduction if a dedicated space is used exclusively for the business
- Business-related software, subscriptions, and tools
- Mileage driven for business purposes — purchasing inventory, making deliveries
- A proportional share of your phone bill if used for business
These deductions reduce the net profit on which your federal and Arizona income tax — and your self-employment tax — is calculated. A seller who collects $30,000 in gross Etsy revenue but spends $18,000 on materials, supplies, shipping, and fees has $12,000 in net taxable income, not $30,000. The difference in tax liability between the two numbers is substantial, and the only way to capture it is through organized records of all legitimate expenses.
What Happens If You Don’t Report It
The IRS has been direct about its increasing ability to track platform-based income. With 1099-K data flowing directly from payment processors and marketplaces, the IRS system can identify discrepancies between what platforms report and what taxpayers report on their returns. When a mismatch is detected, the typical sequence starts with an automated CP2000 notice — a proposed adjustment to your tax return based on the unreported income — followed by a proposed additional tax assessment, interest from the original due date, and potentially a failure-to-report penalty.
For repeated or willful non-reporting, the exposure escalates. Civil fraud penalties can reach 75% of the underpaid tax, and criminal charges, while reserved for the most serious cases, are a legal possibility for deliberate tax evasion. For the vast majority of platform sellers who simply weren’t aware of their obligations, the resolution involves filing amended returns, paying the additional tax owed, and addressing any penalty and interest — a manageable but costly outcome that proactive reporting avoids entirely.
Arizona mirrors the federal posture on unreported income. If the IRS adjusts your federal return to include unreported platform income, the ADOR will follow with a corresponding state adjustment and its own penalty and interest assessment.
Practical Steps to Stay Compliant
Getting compliant with platform income reporting doesn’t require an accounting degree, but it does require consistent habits. Whether you’re a casual occasional seller or someone running a genuine side business through digital platforms, these practices keep you protected:
- Keep a dedicated record of every sale, the gross amount received, the original cost of the item, and any expenses directly related to that sale
- Download your transaction history from every platform at least quarterly so records are current, and nothing gets missed at year-end
- Separate business and personal transactions — avoid using the same Venmo or PayPal account for both personal reimbursements and business payments
- Set aside a percentage of platform income — typically 25% to 30% for combined federal and state tax — in a dedicated savings account throughout the year
- If your annual net platform income exceeds $1,000, work with a tax professional to determine whether quarterly estimated tax payments are required
Conclusion
The question “do I have to report this?” has a clear answer: yes, if it’s income from selling goods or services, it’s taxable — regardless of whether a 1099-K was issued, regardless of which platform it came through, and regardless of whether you think of your side hustle as a “real” business. The IRS does not distinguish between a professional Etsy shop and someone who occasionally sells services through Venmo. Both are earning taxable income.
The current legislative restoration of the $20,000 and 200 transaction threshold means fewer taxpayers will receive 1099-K forms from platforms, but it does not reduce anyone’s tax obligation on income earned. It simply means the IRS has less direct visibility into lower-volume activity, not that lower-volume activity is exempt. The taxpayers who stay ahead of this issue are the ones who track income and expenses throughout the year, report accurately at filing time, and work with a CPA who understands both the federal and Arizona-specific dimensions of their situation.
If you’re earning income through any of these platforms and aren’t sure what you’re required to report, how to calculate your deductible expenses, or whether you need to make quarterly estimated payments to the IRS and the Arizona Department of Revenue, Arizona Tax Accounting and Consulting Services is ready to help. Reach out today and take the guesswork out of your tax obligations before they become a problem.