As a business owner, you probably have your tax routine down pat. Send out 1099’s to contractor by January 31st, get that Schedule C filed by April 15th. (Or, if you have a corporation, get all THOSE fun tax papers together!) Either way, when you’ve got tax time down to a science, it can be a little disconcerting when a monkey wrench is thrown into your carefully organized works. But this year such a thing exists and it’s the brand new tax form 1099-K.
What is Form 1099-K?
If you receive money from clients or work as an independent contractor, you’re probably accustomed to receiving form 1099 every February. This information form reports your income to you and to the IRS. The brand new form 1099-K, sometimes known colloquially as the “PayPal 1099” is similar, though instead of coming to your mailbox from clients, it comes to you from PayPal, Amazon, and other payment processors like credit card companies. So if you used one of those payment processors to collect money this year – say from clients or by selling items online – then you may be one of the business owners slated to receive one, or more 1099-K’s this year.
Why Form 1099-K?
Though it seems like 1099-K just came to your mailbox out of the blue, this mysterious new tax form’s origins actually go back a few years. The United States has always suffered from what’s known as the “tax gap.” This term just means the difference between income actually earned in this country and income actually reported to the IRS. This is why, for instance, businesses are required to send out W-2’s to employees and 1099’s to contractors. By 2008, congress suspected that the rise of ecommerce selling was causing quite a sizeable tax gap, as people made money through sources like eBay and Amazon but – perhaps – didn’t report that income to the IRS or pay their fair share of taxes. Thus, with the passing of the 2008 Housing Assistance Tax Act, Congress also required that payment processors like PayPal or credit card payment processors issue form 1099-K to people who receive income through those sources. This form is also sent to the IRS so they can know what to expect when ecommerce sellers file their tax returns.
So, if you use PayPal, or accept money via credit card, you may have a surprise in your mailbox come February, unless…
Form 1099-K Requirements Not everyone who accepts money via PayPal, Amazon, credit card or other payment processors will receive the 1099-K. There are two big criteria you must meet if you are to get the 1099-K:
- Must have made over $20,000 through Amazon, PayPal, credit cards, etc.
- That $20K must have been made through 200 or more transactions
If you don’t meet either one of those criteria, then you won’t get the form in the mail. If you do get it, though, never fear. Basically the 1099K just reports what you should be tracking anyway – your income. Your biggest responsibility is to make sure that those numbers match up with your own records. (And Outright.com can help you determine that quickly and easily!)
Further, the advent of the new 1099-K form makes it more important than ever that you keep track of your business expenses. Now the IRS will know just exactly how much you brought in, but they’ll have no idea how much you spent unless you tell them and document your expenses. Be sure to track all of your business expenses for the year and save your receipts should proof be required.
Remember, this new tax form came about simply because congress wanted to catch small business people who weren’t paying their way, not to penalize people who have always had a good handle on their taxes. If you’re still confused or concerned, though, please visit Outright’s Tax Resource Center for more information on 1099-K in particular and self-employment taxes in general!
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