Understanding the 1099-K
A few years ago, the IRS released the 1099-K, a form designed to help to increase collections without having to raise taxes. This form requires that credit card providers (banks, credit unions, Paypal, etc.) report total payments made using their cards to the recipients, effectively ensuring that any income collected by “professional” sellers (see next paragraph) using eBay/Amazon/Etsy/etc. would be subject to federal taxation. Previously associated with the 1099-MISC and tied in with payments received via cash, check, EFT, ACH and direct deposits, all processed credit card payments are now handled separately.
While this tax legislation doesn’t affect the occasional eBay seller (the form is only filed when a seller has more than $20,000 in sales or more than 200 transactions in any given year), it certainly affects part-time and full-time professional sellers who had previously escaped taxation on potentially significant income amounts. Here’s how it works:
- First, the payments collected using Visa, Mastercard, American Express, Bank Debit Cards, Store Value Cards and payment processors such as PayPal are reported by the issuing company using a 1099-K.
- Second, those totals are entered and tracked by the recipients using a new line appearing on Schedule C (sellers must also be sure to account for fees, refunds and/or charge-backs resulting from returns and allowances).
With the 1099-K process, Schedule C individuals will need to be aware of the following potential pitfalls when preparing and processing their personal/small business tax returns:
- Duplicate reporting – the reporting of the same amounts on both the 1099-MISC and 1099-K lines.
- Differing amounts – differences between the 1099-K and monthly statements that can result from
1099-K reporting sales by transaction dates while monthly statements report sales by settlement dates.
The 1099-K reporting gross sales, while monthly statements typically report both gross and net sales.
An individual having multiple merchant accounts with the same Taxpayer Identification Number (TIN).
Individuals collecting payments using credit cards and/or third-party settlement organizations should expect to receive their 1099-Ks payee statements from all processors no later than the last day of January of the year following the transactions (a month before they are due to the IRS). If any of the information submitted on a Form 1099-K is incorrect, individuals should contact the processing company (whose name appears in the upper left corner on the front of the form).
If you are in need of assistance with your 1099-K, 1099-MISC or any related accounting/bookkeeping/tax issue, please contact Lescault and Walderman at 866-496-2042.
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