A 1099-K form is a new type of tax form that went into effect in 2012 after the Housing and Economic Recovery Act, or HERA, was signed into law by President Bush. Snuck inside of this housing bill was a rule meant to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.”
Because the form is relatively new, it can cause confusion amongst business owners. The guide below will help you understand the basics that you need to know about the 1099-K form and how to report it on your taxes.
What Is A 1099-K Form?
The 1099-K form is used to allow the IRS to keep a record of all payments you received from payment card transactions (debit cards, credit cards, and gift cards) and third-party payment network transactions that meet certain reporting thresholds (gross payments that exceed $20,000 and over 200 transactions). The 1099-K form reports the gross amount of all reportable payment transactions.
Who Files a 1099-K form?
Now that you know what a 1099-K form is, you are probably wondering who files this form. Credit card companies like Visa and MasterCard, and third-party processors like PayPal, Etsy, eBay, and Amazon are required to report the transactions that they process for retailers. They report these transactions by filing the 1099-K form with the IRS and sending the retailer (you) a copy.
Credit card companies are required to file a 1099-K form for all payment card transactions.
Third-party settlement organizations are only required to file a form 1099-K for your business if you process more than $20,000 in transactions per year, and over 200 transactions total. Note that these minimums are PER PROCESSOR, not your total transactions. For example, if you have an ACH merchant account through which you process 100 transactions for a total of $10,000 and a credit card merchant account through which you process 150 transactions for a total of $15,000 you will receive a 1099-K from the credit card processor but not the ACH provider. If you process 200 $100 transactions via PayPal you will receive a 1099-K from PayPal. If you process 100 $5 transactions via PayPal and 100 $5 transactions via Google Checkout, you will not receive a 1099-K from either provider. The 1099-K form can be delivered electronically if you provide that permission. It must also be accompanied by a statement breaking down your transactions by month.
What Is A 1099K Form Used For?
The 1099-K form is used to make sure online retailers are reporting sales for tax purposes. In other words, it is an accountability tool that the IRS put in place to make sure online retailers are not under-reporting their sales and income. For example, if you report your taxes and you don’t claim your online sales, the IRS would know because they would’ve received 1099-K forms from credit card companies and third-party settlement organizations.
How To Report the 1099-K For Small Business
While it may seem overwhelming, the reporting requirements of a 1099-K form are pretty straight forward. If you have a small business that operates under a sole proprietorship, you will report the income listed on your 1099-K form on your Schedule C on a separate revenue line. If you have multiple 1099-K forms you may want to wait until after January 31 to ensure that you’ve received all of the forms and you don’t accidentally miss listing income on your tax forms.
Since the 1099-K is an accountability tool for the IRS, it’s important for you to make sure your business income reflects the accurate amount of money you received and takes into account online transactions (as listed on your 1099-K forms) as well as income received in the form of cash and checks.
It is possible that you may not receive 1099-K forms for all the online transactions that your business processed throughout the year. Even if that is the case it is important to accurately report the total income your business brought in through various payment forms to avoid being audited and having to pay back taxes and penalties.
It is also possible that you could have income double reported on multiple 1099-K forms. In some cases, such as if you are sharing a credit card processing terminal with another business owner, the 1099-K form may reflect more income than you would claim on your taxes. Thus, it is important for you to accurately track your business income and not rely on getting the 1099-K forms from various companies as your sole way of tracking your online business revenue. Having good business records is vital to running a small business so you can accurately track the profitability of your business as well as show proper documentation to the IRS in the case that you get audited.
What’s the difference between the 1099-K form and the 1099-MISC form?
Because both the 1099-K and the 1099-MISC start with 1099 it can be easy to confuse these two forms. However, they have important distinctions. While they are similar in the fact that they both report income, they are different in regards to the type of income and who sends them. As mentioned above, credit card companies and third-party processors are required to send out the 1099-K forms to report bank card income. 1099-MISC forms, on the other hand, are sent out by any business that pays an independent contractor $600 or more in a given year.
Tax forms can be confusing, and it may be challenging to understand what forms and receipts you need to keep and give to your accountant. For more information about what to keep for tax time, consider reading this post. If you are feeling overwhelmed with taxes or business finances, make sure you have a trusted accountant on your team. You may also want to consider streamlining your tax filing process by connecting your payment and accounting softwares. The PaySimple integration with Quickbooks does just that, delivering time-saving efficiencies to businesses during filing season. Schedule a personal demo to learn more.
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