With tax season in the offing, we've been fielding a lot of questions about one particular bit of IRS business:
Form 1099-K.
Maybe you received one of these in the mail and were like this:
Don't worry. The 1099-K is informational in nature. The IRS sends it to you to help make sure that you don't forget any income you might have received via:
- Payment card transactions (e.g., debit, credit or stored-value cards)
- In settlement of third-party payment network transactions above the minimum reporting thresholds BOTH of gross payments that exceed $20,000 AND more than 200 such transactions
It doesn't change how much you pay in taxes. Rather, the 1099-K is there to help you avoid penalties and audits for not filing properly. (Oh that IRS. Always so helpful.)
[Tweet “Got a strange tax form in the mail? We'll help you figure it out.”]Depending on what third-party provider issued your 1099-K, the number it shows will probably be close to your total income for your business. But don't freak out if it doesn't show an exact match. Remember, this form reflects only your gross income from transactions with that specific provider. Bear in mind that the 1099K amount represents the gross amount of funds processed by the third party. This includes the amounts that were refunded, discounted and sales tax collected.
However, the IRS will compare the amount on your 1099-K with the amount of gross income on your tax return. Consequently, it will affect how you “show” the numbers on your tax return.
What Do I Do With the 1099-K?
Let's walk through it together.
Say Amazon issued a payment of $85,234 on December 30, 2016 and you received the funds into your bank account on January 3, 2017. Normal, right? That $85,234 will be included on the 1099-K Amazon sends you. However, it may not be included in your accounting records for 2016, because–duh–you didn't get the money until 2017.
Sticky situation, but easy to fix. Here's how to record this on your tax return:
1099K amount: $85,234.00
Sales tax reported elsewhere: $(2,120.00)
Returns reported separately: $(6,300.00)
Discounts reported separately: $(1,594.00)
Timing differences in deposits $(7,523.00)
Amount reported as gross income on tax return: $67,697.00
This right here ↑ is the amount that will agree to your accounting records as income.
If the amounts on your tax return are not at least as much as the 1099K amount, the IRS will most likely send you a notice of tax due believing you underreported your income and, consequently, owe additional tax.
Which is not the end of the world, but still not fun when you were all done with your taxes.
[Tweet “Finding out you owe more taxes when you thought you were done? No thanks.”]So…the 1099-K Is Never Wrong?
As we always say, just because you receive notice of something doesn’t make it so. If you get a 1099-K and it shows numbers that are vastly different from the income reflected in your own accounting, don't be shy…ask! Inquire with the provider so they can explain the reasoning for the discrepancy.
Again, the sales information reported by Amazon never matches the business owner’s understanding of the sales they see in their accounting/bookkeeping system or payment statements. That's because Amazon keeps their books differently from how individual ecommerce merchants do.
The only real red flag is if you are reporting income that is LESS than what is represented on your 1099K forms. If that happens, then you likely need to dig a little deeper as to why that could be. It doesn’t mean it’s wrong or that you’re reporting something inaccurately for tax purposes, it just means you need to take a deeper look to make sure it’s right.
However, if you're reporting more income than is represented on your 1099-K, it's a good sign that you're on track with reporting all that you’ve earned in gross receipts.
[Tweet “How to know you're using #tax form #1099K correctly: “]The Bottom Line
If you are keeping current and accurate accounting records, there's nothing to be afraid of when it comes to the 1099-K. (Or the IRS, for that matter.) This new document is just a way to cross-reference your gross income and make sure that you and Uncle Sam are on the same page. Treat it the same as everything else with your financials: don't procrastinate, compare it against your records, and don't be shy about asking questions if you're confused.
Amazon has created a helpful guide for you on what to do with the 1099-K.
Click here to access it.
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