Shopify 1099-K Thresholds Are Dropping: What Every Seller Needs to Do Now

The rules around Shopify 1099-K reporting have been in flux for years, and sellers cannot afford to ignore the latest changes.

While the federal threshold recently returned to $20,000 and 200 transactions, several states still require reporting at $600 with no transaction minimum.

If your Shopify payments exceed these limits, you will receive a 1099-K that reports gross payment volume, including shipping, taxes, and refunds. That inflated number can create confusion at tax time if you are not prepared.

This guide breaks down what every seller needs to know about Shopify 1099-K requirements and how to stay compliant.

Why Shopify 1099-K thresholds are dropping and what it means for sellers

The IRS is lowering Shopify 1099-K thresholds to close tax gaps and increase compliance. Every seller, regardless of size, will soon be under greater scrutiny:

Table 1: The IRS is phasing in lower 1099-K thresholds through 2026

The IRS is lowering these thresholds to combat underreported income and broaden the tax base. This change applies to all payment platforms, including PayPal, Amazon, Stripe, and others.

As a result, millions of sellers who previously did not receive 1099-Ks will now be required to report, reconcile, and defend their numbers.

To prepare, you need to understand exactly what the Shopify 1099-K reports and what it does not.

Suggested read: QuickBooks 1099 E-Filing for Ecommerce

What your Shopify 1099-K actually reports

The Shopify 1099-K only shows gross sales processed, not your net income or true tax liability.

Your 1099-K reports the total payments processed through Shopify Payments or other processors. It captures every dollar that flows through your payment gateway, regardless of what happens afterward.

1099-K includes:

• All payment card transactions
• Digital wallet payments (Apple Pay, Google Pay)
• Buy now, pay later transactions
• Gift card redemptions
• Total sales before any deductions

1099-K does NOT include:

• Returns and refunds issued
• Platform fees and processing costs
• Shipping charges
• Cost of goods sold (COGS)
• Business expenses or deductions
• Ecommerce sales tax collected

Many sellers mistakenly treat their 1099-K amount as taxable income. This creates massive discrepancies when filing taxes.

For example, if you process $100,000 through Shopify Payments, but after $15,000 in returns, $3,000 in processing fees, and $40,000 in product costs, your actual profit is $42,000. However, your 1099-K shows $100,000, creating a $58,000 gap that the IRS will question.

Platform differences matter:

Table 2: 1099-K differences by platform

This gap between gross and net is where most sellers get tripped up, especially as thresholds drop.

Suggested read: How to File a Form 1099: Step-by-Step Guide

3 ways the $600 threshold will disrupt your operations

Lower thresholds mean more sellers face audits, cash flow disruptions, and time-consuming reconciliation. Manual processes will not keep up.

Audit risk spikes

When the threshold drops to $600, the IRS will process millions more Shopify 1099-K forms. More forms mean more automated matching against tax returns. Any mismatch triggers a notice.

For example, a seller with $50,000 in gross sales but $35,000 in net income faces a $15,000 discrepancy red flag. The IRS system sees you reported $35,000 on your tax return, but received a 1099-K showing $50,000.

Result: An automated CP2000 notice demanding explanation or payment.

Cash flow crunch

Lower thresholds mean more frequent reporting and potential IRS holds.

Ecommerce payment processors may delay payouts or increase reserve holds to cover potential tax or compliance risks. This can disrupt your cash flow, especially if you rely on fast access to funds for inventory or payroll.

Multi-platform confusion

Sellers using Shopify, PayPal, Amazon, and other platforms will receive multiple 1099-Ks. Each form reports only that platform’s gross sales, with different fee structures and timing.

If you do not reconcile and combine these forms correctly, you risk double-counting income or missing transactions entirely.

So how do you turn a messy Shopify 1099-K into an accurate tax report? It starts with reconciliation.

Suggested read: Ultimate Guide for Ecommerce Tax Filing

How to reconcile your Shopify 1099-K: Step-by-step process

Reconciliation is the only way to ensure your tax return matches your true business reality and to avoid costly errors.

Step 1: Download your 1099-K and accounting system reports

• Access your 1099-K from Shopify Payments (or other platforms)
• Export detailed transaction reports for the full tax year
• Download your accounting system’s profit and loss statement

Step 2: Subtract all refunds, returns, and platform fees

• Identify all refunds and returns in your Shopify reports
• Subtract payment processing and platform fees
• Remove any sales tax collected on behalf of states

Step 3: Add COGS, shipping, and inventory adjustments

• Include the cost of goods sold for all items
• Add shipping costs and inventory adjustments
• Ensure these are reflected in your accounting system

Step 4: Document any discrepancies

• Keep digital records of all adjustments
• Save supporting documents for audit readiness

Manual reconciliation works until your volume or channels grow. Here is how to scale your process before the next threshold drop.

Suggested read: Shopify Seller’s Sales Tax Roadmap: From Launch to Multi-State

How to scale your Shopify 1099-K process as your business grows

While federal thresholds have stabilized at $20,000 and 200 transactions, state-level requirements remain much lower. Sellers in Massachusetts, Maryland, Virginia, Vermont, and other states still face $600 thresholds.

As your Shopify sales increase, so does the complexity of tracking, reconciling, and reporting your Shopify 1099-K data accurately.

Here is how to build a process that scales with your business.

Separate business and personal transactions

Shopify Payments reports gross payment volume without distinguishing between business sales and personal refunds or reimbursements.

If you use the same account for mixed purposes, your Shopify 1099-K will overstate taxable income.

• Use a dedicated bank account and payment processor for your Shopify store
• Never run personal transactions through Shopify Payments
• Keep gift payments, reimbursements, and non-sale transfers out of your business accounts

Suggested read: Must-Have Tools for Your Shopify Tech Stack

Track adjustments throughout the year

Your Shopify 1099-K reports gross receipts. It includes refunds, shipping charges, and sales tax you collected on behalf of states. Without records to back out these amounts, you risk overpaying on taxes.

• Maintain monthly records of refunds and chargebacks
• Track shipping revenue separately from product revenue
• Document sales tax collected and remitted by jurisdiction
• Reconcile Shopify payouts to your bank deposits regularly

Suggested read: Hiring Shopify Accountants: 7 Common Mistakes to Avoid

Automate your accounting integration

Webgility connects Shopify directly to QuickBooks, Xero, or NetSuite and posts every order with full detail. Fees, taxes, refunds, and shipping flow into the correct accounts automatically.

When your Shopify 1099-K arrives, your books already reflect the transactions it reports, making reconciliation straightforward.

• Connect Shopify directly to your accounting software
• Ensure every order posts with line-item detail, including fees and taxes
• Automate payout reconciliation so your books match your bank statements
• Capture transaction-level data that supports your Shopify 1099-K reporting

Prepare for state-level reporting

Even if you fall below the federal threshold, your state may still require a Shopify 1099-K. Understand where you have obligations and plan accordingly.

• Confirm your state's reporting threshold and transaction requirements
• Check whether your state participates in the Combined Federal/State Filing Program
• Keep records that satisfy both federal and state requirements
• Consult a tax professional if you sell into multiple states with different rules

Suggested read: Shopify Accounting: Best Practices, Automation & Tips

Reconcile before tax season

Webgility imports Shopify settlement data and matches payouts to the orders and fees that comprise them.

Discrepancies surface in real time rather than months later. You close your books with confidence each month, and year-end becomes a quick verification instead of a forensic exercise.

• Compare Shopify Payments reports to your accounting records each month
• Investigate discrepancies while the details are fresh
• Document adjustments clearly so your CPA understands the backup
• Run a year-end reconciliation in early December to catch issues before forms arrive

Rareform, a multichannel retailer, cut bookkeeping hours by 50% and saved thousands in accounting fees after automating their Shopify workflows through Webgility. Accurate, real-time data meant no surprises at tax time.

Schedule a demo with Webgility today.

Frequently asked questions (FAQs)

What is the new 1099-K threshold for Shopify sellers?

The IRS is phasing in a $600 threshold by 2026, down from $20,000. Some states already require reporting at $600.

Does the 1099-K mean I owe taxes on gross sales?

No. The 1099-K reports gross sales, not your net profit. You must reconcile to account for refunds, fees, and expenses.

How do I reconcile multiple 1099-Ks from different platforms?

Download each form, match transactions to your accounting records, and combine totals carefully to avoid double-counting. Automation can simplify this process.

What happens if my 1099-K does not match my tax return?

The IRS may send a CP2000 notice. You will need to provide documentation showing why your reported income differs. Keeping organized records is essential.