Why do I have to pay federal tax on Paypal income in Virginia that is below the federal threshold?

[gregpugliese]

In 2020 Virginia lowered the TSPO reporting threshold to $600, matching that of the federal 1099-MISC.  The federal threshold for having to report TSPO income remains $20000 and/or over 200 transactions per year.  In 2020 I had $2200 in Paypal transaction income from selling my used items online.  When I enter the info from my Paypal 1099K into TurboTax, it makes me pay ~20% federal tax on that income, and ~23% Virginia tax on it.   If the $600 reporting threshold is only for VA, and I remain below the federal reporting threshold, why does TurboTax now show that am I paying federal tax on that income?

[gregpugliese]

Sorry, I meant about 6% VA tax, not 23%.

[JeffreyR77]

You are still required to report all income received from all sources on both your federal and Virginia income tax returns.

The transaction reporting thresholds for online merchants do not affect the amounts you are required to report and pay income tax on.   When you enter your Paypal income into TurboTax the program will automatically carry it to your Virginia return to calculate the proper amount of state tax you have to pay on it. 

If I didn't get a 1099-NEC or 1099-MISC, do I stil...

[gregpugliese]

Thank you for the quick reply. Would I be correct in assuming that if I did not live in one of the states that have changed their TPSO reporting thresholds to be below the federal threshold, then PayPal would not have issued me a 1099K and would not have reported that information to the IRS? If that is true, then obviously I would not be paying federal or state taxes on that PayPal income. The intent of the Virginia law change was to generate more tax revenue for the state of Virginia, but because I’m now having to report it on my federal income return also, I’m now also paying federal tax on it — tax that I would not be paying if I didn’t live in one of those few states. That doesn’t seem logical, does it?

I should also note that in prior years, before Virginia made this law change in 2020, I never received 1099Ks from PayPal and I presume my PayPal income was never reported to the IRS. That leads me to believe that if I lived in a state that did not have this lower threshold, I would not have to pay federal tax on it.

[MaryK4]

You are required to report and pay taxes on all income (if required), regardless of whether you receive a form for it.  Moving to another state that does not require the form does not change that law.  

@gregpugliese