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.