Do I still have to report my income if I did not meet the self-employment threshold of $20,000 and 200 sales?

The IRS is correct.  You have to report your self-employment income if you received $400 or more.  Regardless if you receive a Form 1099-K or not.

If you have even $400 of self-employment income you are required to file a tax return and pay self-employment tax for Social Security and Medicare, and perhaps ordinary income tax.  Do not confuse PayPal's criteria with your own filing requirements.

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You absolutely have to include the income. Third party payers have a threshhold at which they are required to send you a form. Just because you didn't get the form is not a reason to not report. For IRS purposes, anything over $400 has to be reported as self-employment income. 

They don't have to send you the 1099 for less than 20,000.  But you still have to report all your income no matter how small.  Even $1 of bank interest you don't get a 1099INT for.  

All of the above answers are correct.

Yes, the amount of income you received is taxable on your federal return and on your state return. Whether you get a tax form or not, doesn't matter. Per IRS, all income is taxable unless the IRS code specifically states it's not taxable. A list is available in Publication 525, Taxable and Nontaxable Income.

You're considered self-employed—even if it’s just something you do on the side, like dog walker, drive for Uber, babysit, or blog.

Your taxes are handled differently than when you're an employee of a company.

As a self-employed individual you:

• Will pay self-employment tax (because income tax, Social Security, and Medicare aren’t deducted from your pay)
• Will get a 1099-MISC, 1099-NEC, or 1099-K (unless you only accept cash or personal checks)
• File a Schedule C, Form 1040 (this is how you report business expense or loss of income)
• Can deduct money you spent on work-related expenses (like mileage, home office expenses, and mobile phone use)
• Can estimate the taxes that are due and make quarterly estimated tax payments during the year

If your self-employment income was only from cash, personal checks, credit card payments, or cryptocurrency 

1. Open or continue your return in TurboTax
2. Search for Schedule C and select the Jump to link at the top of the search results
3. Answer Yes on the Did you have any self-employment income or expenses? screen
   • If you land on the Your 2022 self-employed work summary page, select Review next to the work you're adding income for
4. Answer the questions on the following screens until you arrive at Let's enter the income for your work
5. Select Other self-employed income and select Continue
6. On the next page you can enter any cash, personal checks, credit card payments, or cryptocurrency (Form 1099-K) related to your self-employment

Related Information:

• Where do I enter my self-employment business expenses, like home office, vehicle mileage, and suppli...
• What self-employed expenses can I deduct?
• Am I considered self-employed?