One of the newest tax forms to be released is the 1099-K.
This new 1099 tax form is designed by the IRS to help catch those who under-report their income from online business transactions.
Concerns that sellers on eBay are not reporting their income, as well as other third-party transactions handled by banks and processors like PayPal, are being overlooked as income, the IRS is hoping that the 1099-K tax form can help them recapture lost revenue.
Who Issues the 1099-K?
Rather than being issued by business owners, the 1099-K is issued by third-party payment processors.
Banks, PayPal, and other processors are supposed to issue them to those who have completed at least $20,000 in sales, as well as 200 transactions, over the course of the year.
So, if you sell crafts on eBay, and you sold at least 200 items, and saw $20,000 in sales, chances are that you have a 1099-K form.
The thresholds are designed to avoid causing problems for those who are only casual sellers. That way, if you clean out your attic and sell $2,000 worth of stuff, you aren’t going to be penalized by the IRS, and you won’t receive a 1099-K.
Realize, though, that the 1099-K doesn’t take into account the fees that you pay.
If you want to be able to offset that income, you will need to keep track of the fees you pay to eBay and PayPal, and deduct them against your income.
These fees are deductible as business expenses, so keep track of them — since the 1099-K won’t do it for you.
It’s up to you to track and document your expenses.
Realize that it is only the third-party payment processors issuing 1099-K forms.
Your employers shouldn’t issue them, and those that hire you as an independent contractor shouldn’t be sending you a 1099-K, either. (I do have some clients that have decided not to issue 1099-MISC forms anymore because PayPal will be handling the income reporting with the 1099-K. However, I haven’t found an IRS position on that.)
How Does the 1099-K Affect You?
For 2012, the 1099-K shouldn’t affect you.
Even though some issuers already sent it out (I received one from PayPal for my freelancing business), the IRS isn’t “counting” it this year. There are some issues with the 1099-K that need to be ironed out, and so the real reporting with them won’t take effect until 2013.
One of the possible problems comes from business owners and service providers who handle transactions through PayPal.
I fall into this category, and my situation is a good illustration of one of the ways that the 1099-K could affect you. The 1099-K reflects the transactions that come through your third-party account, whether it’s a bank, PayPal, or some other processor. T his means that all of the income processed by these companies is reported.
At the same time, you might have clients that consider you an independent contractor.
As a freelance writer, this is the case for me. I have a number of clients that issue me 1099-MISC forms at the end of the year. Most of these clients also pay me via PayPal.
So, independent contractors issue the 1099-MISC, and PayPal issues me a 1099-K.
I went through and reconciled my 1099s this year, and found that a large portion of my income would have been double reported if the 1099-K had truly gone into effect this year, since two different entities issued me two different 1099s for the same income.
Going forward, if this situation isn’t remedied by the IRS, it could mean an additional step for independent contractors.
We’d have to reconcile our 1099-K income with the 1099-MISC income — as well as reconcile it with our own records. Being able to identify which income is likely double-reported is an important part of the situation as well, since you might be audited on the basis of your income.
Of course, this might the issue that the IRS is trying to resolve right now, as it is one that could potentially affect thousands of people with home business and side businesses.
It will be interesting to see what the rules are for reporting next year.
But, in the meantime, it’s a good idea to maintain good records, and always keep track of your income and the expenses that offset it.
Jenna, Adaptu Community Manager says
I did make some money off half.com this year but definitely not anywhere near $20,000. No 1099-K for me, but thanks for sharing.
Glen Craig says
The form seems like a pain in that it can cause double-reporting. But on the other hand it’s good to be earning enough money to get the form.
Alexander E Soule says
3 minutes ago
Alexander E Soule
Reading your article on IRS form 1099k you did not mention that the amount on the 1099k also includes Sales tax(I live in NY so I’m require by law to collect sales tax). IRS does not have a place to take into account sales tax collected. Thus I sell 10000 dollars worth of goods on a credit card I have to add 800 dollars of sales tax this is then include on the 1099k I receive from my credit card provider which I put on my Form C thus paying tax on tax. What wrong with this picture?
Two things to note:
1) The 1099-K instructions say that amounts paid by a third party are to be reported on a 1099-k INSTEAD OF a 1099-MISC and 1099-k’s are only to be filled out by third party payment companies. So the interpretation is that if you paid by credit card or by paypal you should NOT be issuing a 1099-MISC at all and it is instead up to them to report.
2) Paypal does NOT include in these thresholds, amounts sent for personal reasons. Only amounts that are sent to you as business payments for goods and services of which you are charged the almighty merchant fee.
Ben Kweller says
This last September I started working as an independent contractor for a company that pays me via paypal. The earning for this year don’t are shy $20k. Does this mean I do not receive a 1099-k and that these earning don’t need to be reported?
It means that PayPal doesn’t HAVE to issue you a form, but you might still do it anyway. You’ll have to watch for it. However, even if you don’t receive a 1099K form, you might receive a 1099-MISC from the company that hired you. If the company paid you more than $600, it is required to issue you a 1099-MISC, and report it to the IRS. But, whether or not you receive a form, the IRS still expects you to report ALL of your income. Even if you didn’t make enough to pay taxes on it, the still requires you to report it, whether or not someone sends you a form.
ashley haynes says
i dont think i hit this threshold last year, but how long should i wait to see if i did? for instance, do they have to sed the 1099s outby a certain date ?
I got a 1099 K this year and i do business in a store not online “Daiquiri shop” and to me it’s another big pain because all my prices are fixed and thats tax included. now i have to deduct the state, local, and parish tax as well as the the fees that are paid to the merchant services that i pay them. thats a big pill of paper work to keep up with just to off set the amount shown on the total. now just think of the stores with returns ect.