When it’s time to do your taxes for your business, the last thing you want is a big surprise. The tax season is stressful enough without something else coming in at the last minute and messing all your numbers up!
Unfortunately, you may indeed be in for a surprise this February when you get the 1099-K tax form in your mailbox. If your taxes weren’t confusing before, now you have this dumb thing to contend with! What’s going on here?
Luckily, the 1099-K isn’t a game changer, once you know what it is. Here’s a brief overview of what to expect.
The 1099-K Form
The 1099-K is a form that the IRS uses to track how much income online sellers made through online payment processors like PayPal. This is also why the form has been referred to as the “PayPal 1099” in the past.
Basically, the government has always had a problem with people who make money but fail to report that income on their tax returns. They noticed that online sales, especially, seemed to be falling through the cracks. Since electronic income is easily traceable, they passed a law requiring payment processors like PayPal, Amazon, Etsy, credit card companies and the like to report when online sellers made income through their services. This led to the 1099-K form that just might be arriving in your mailbox very soon.
What’s On the 1099-K?
So if the form is just for tracking money, what’s actually on the form? Well, that’s the thing – that’s all there is on the form, how much you made through online sales from a single payment processor. It doesn’t keep track of refunds or chargebacks or Etsy fees, and it especially doesn’t show anything about the expenses you may have incurred running your business. The 1099-K literally just shows how much money you brought in through PayPal or other online payment processor.
This means when you do your taxes, you still have to figure out things like business expenses and the like. None of that is reported on the 1099-K so you’re still responsible for figuring out how much you really owe.
Plus, did you know you may not actually get the 1099-K? There are two criteria you must fit to get the form; otherwise, you’re out of the woods. For one, you must have made at least $20,000 in the taxable year (2012). Secondly, you must have made that $20,000 in 200 transactions or more. If you don’t fit both of those, you don’t get the form.
What do I do with the 1099-K?
If you do end up getting the 1099-K next year, try not to freak out too much. Since the form is purely informative, there isn’t much more for you to do. Verify the number is correct with your own calculations (just in case) then go about inserting the information on your tax forms. That’s really about it!
While the 1099-K was around last year, this is the first year that the IRS will be verifying the amount on your 1099-K against your tax return. So if you claim that you made $18,000 in gross revenue (that’s ALL your revenue, not counting refunds, fees, expenses, etc.) but your 1099-K says you made $21,000, then you may receive a letter, an adjustment or even suffer through and audit. So be sure you’re counting all of your gross revenue, then subtracting expenses.
Of course it’s always a good idea to keep any tax forms around for a few years just in case something is misreported or there’s an error. Also, you should look out for the 1099-K from now on; this isn’t a one-time thing. But now that you know how to handle it, the form should be no sweat.
This guest post is brought to you by Outright.com, the simplest way to track your handmade income online and the alternative to Mint for business. Try a free Outright account today!
Image Credit: Shutterstock.comSuscribe to the podcast