Small Business

Can Tax Form 1099-K Derail Your eCommerce Taxes?

by Mark Faggiano

Ever since they first landed in mailboxes almost three years ago, tax form 1099-K has been a source of confusion for online sellers.

Today we want to clear up what form 1099-K actually is, who gets it, and what online sellers need to do with it when it arrives.

form 1099-K sales tax

What is Form 1099-K?

The form 1099-K, for “Payment Card and Third Party Network Transactions” is the form sent to online sellers and federal taxing authorities by 3rd-party entities that handle their payments.

In layman’s terms? If you earn income and are paid through a payment processor like PayPal, Amazon, or Etsy in the last taxable year, then that company is required to report that you made that income and let you and the IRS know about it.

The 1099-K is a federal form, so this information is not reported to the individual state’s departments of revenue.

Additionally, if you have an agreement with a credit card processor like Visa or MasterCard, you’ll receive a 1099-K if you process over $600 in income that year through that source. (This does not typically apply to most sellers reading this article!)

Why Form 1099-K?

The need for this form came about in 2008 as part of the Housing Assistance Tax Act. Lawmakers added a proviso requiring 3rd party payment processor reporting because research had shown that online sellers were not paying income tax on all income. (This may be true of some sellers, but can be very galling to online sellers who take great pains to be in compliance!)

Form 1099-K started arriving in mailboxes in January of 2012, so this will be the 4th year that some online sellers have had to deal with the form.

Who Receives Form 1099-K?

Form 1099-K is only sent to sellers (and the IRS) when that seller has processed over $20,000 in sales volume and 200 transactions with that processor.

For example, if you are a small seller who made 200 sales and $20,000 but collected some of that money through Amazon and some through PayPal, then neither Amazon nor PayPal is required to send you (and the IRS) a 1099-K.

The good news is that form 1099-K is not sent by payment processors to individual states departments of revenue. But keep reading for why sales tax matters, especially to online sellers who collect large amounts of sales tax.

What Should eCommerce Sellers Do with Form 1099-K?

Form 1099-K is informational only, meaning that you don’t have to do anything further with it – like attaching it with your income taxes – once it arrives.

What you should do is match it with your own financial records, ensuring that the payment processor reported your income correctly. Keep in mind that they report gross sales only, so it’s your job to enumerate deductions such as fees, refunds, supplies, postage, etc.

1099-K and the Individual States

While form 1099-K is only required to be sent to the IRS, we have heard rumors from online sellers that the IRS allows state departments of revenue to view their 1099-K database. From there, presumably, these states could then investigate whether an in-state seller is remitting applicable sales tax. At TaxJar we are very serious about proving rumors. That said, collecting and remitting sales tax is the law in the vast majority of states where an online seller has nexus, so it is important to investigate your compliance whether you receive a 1099-K or not.

Cautions about Form 1099-K

If you receive a form 1099-K, keep these warnings in mind:

  1. The 1099-K only shows your gross sales – Fees that the payment processor charged you are not taken out of this number, and neither are refunds and returns. If you collected shipping revenue though, that amount is included in the gross sales reported on the 1099-K. Because of this, it’s very important that you keep track of your business expenses or else the IRS will have you on the hook for paying income tax on the total amount of gross sales reported on the 1099-K.
  2. Form 1099-K shows sales tax collected as part of your gross sales – Payment processors are not required to keep track of how much of your “gross sales” was actually sales tax that you are required to remit right back to state and local authorities. It’s up to you to use a service like TaxJar to track these amounts, or your income will end up over-reported to the IRS.
  3. Even if you don’t receive a form 1099-K, your income is still taxable – When form 1099-K first arrived on the scene, some online sellers confused this with a new method of tax reporting for online sellers. But the 1099-K’s true intent was to keep tabs on high-volume eCommerce sellers, not replace the way they report income. So even if you don’t receive a 1099-K from a payment processor, we’re afraid you still owe income taxes.
  4. The IRS will match your 1099-K income with the income you report – Starting in the fall of 2012, eCommerce sellers began receiving “1099-k match letters” from the IRS regarding a discrepancy between numbers reported on the 1099-K and seller’s income tax returns. Thought a relatively small number of these letters were sent it, it’s important to make sure that your reported gross income is the same or higher than the amount reported on the 1099-K. And if it isn’t, you need to show proof of why.

As with anything tax related, we can’t stress enough the value of a good eCommerce accountant.

How about Your 1099-K Experiences?

I’m curious. Have you ever had any 1099-K related problems? Did a payment processor report the wrong amount? Did you get a 1099-K match letter last year?  Let us know in the comments as we prepare for tax season.

  • Palomar Luggage

    A couple years ago, I transferred the luggage sales business to my son. In 2012 he filed a Schedule C with his return
    reporting $360k revenue that included the credit card sales of $34k and net
    income of $65k and paid the required tax.

    But I did not think to have the Merchants Card account changed to his name. Now the IRS is asking me to file an amended
    return and pay tax on that $34k and they are insisting even though I have
    explained to him that my son has already reported and paid tax on that income.

    • Hi – for such a specific case I suggest you speak with a tax professional or CPA.

  • Guest

    Do I need to amend my tax return to add a 1099-K ($500) and 1099-INT ($10.83)? I don’t want the IRS to come biting me if I didn’t file these forms?

  • Hi – that question is best directed to a tax professional.

  • skyfta

    For the year 2014 I made 44k total gross , 24k out 44k profit and I paid almost $4,500 federal and $400 to the state in taxes.

  • cangoism

    Hey I’m saling shirts online on squareapace how much money would I have to make untill I have to pay at the end of the year or do I still have to pay while I’m just starting. And how would I calculate how much I have to pay back ? I’m really new to this so any help would be great

  • Brian Ghidinelli

    As a heads up, we received a letter from the State of Tennessee informing us (a California corporation) that we are required to file duplicate copies of either ALL of our 1099Ks OR just those 1099Ks for payees with a TN address to their Department of Revenue. I am not sure they have any jurisdiction. The statute they cite is Tenn. Code Ann 67-6-411, enacted in 2015.

    • Thanks for the heads up. That’s very interesting! And I do know that ever since 1099-K’s began a few years ago that more and more entities have wanted access to them. That sounds like what’s going on here. Sometimes these laws are challenged in court, so we’ll be on the lookout.

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