If you were an independent seller in 2011 then you no doubt remember earlier this year when the 1099-K suddenly popped into your life. It was a confusing time for many small business owners and freelancers who just wanted to do their taxes the way they’re used to. Why does the IRS insist on making things more difficult for you?
Enter form 1099-K.
If 2012 was the first year your small business was open, or if you didn’t meet the requirements to receive a 1099-K last year, then you may not have any idea what a 1099-K is. In fact, the act of doing all your business taxes may be totally foreign to you, something you’re hoping you can put off until the last minute.
Whatever your situation is, new tax forms are never an easy thing to take in and process. You immediately think your money situation is going to be that much harder. After all, when’s the last time the IRS sent you something that made your life easier?
Not so fast. We’re bringing you this blog post now so you can slowly warm to the idea of a 1099-K. Once you finish reading about this little tax form, you might even consider it… your friend.
Luckily for small business owners, the 1099-K actually does make their lives easier. While it initially looks like another terrifying tax form, this one is actually a little different, and has some vital information that can streamline your taxes.
For years there has been a “tax gap” in taxes when it came to online businesses. Since web sales weren’t highly watched or regulated not everybody was reporting the amount of money they were actually paid through online payment processors like PayPal (intentionally or not). As a result, economists took notice that some business owners weren’t reporting all of their income.
In 2008, a law passed mandating the IRS to find a way to tax online sales just as regularly as offline sales. The resulting legislation ended up in the 1099-K, which is a form that online payment processors like PayPal send to you and the IRS to show how much your business earned over the taxable year.
That’s all the form really does – it doesn’t add any more steps to your filing, nor does it change how much you pay or don’t pay. It tells you what you already know – how much you made over the year. If you’ve ever received a 1099-MISC for contract work, then the 1099-K will be essentially familiar to you already.
Making Life Easier
So how does this help you out as a business owner? When you’re trying to get all the numbers together for your taxes, you’ve probably wished for something to go by. Now you have it with the 1099-K.
Naturally we would never suggest just taking someone else’s word for how much you made in the year. Check the numbers for yourself with your records! Hopefully you’ve saved all your invoices throughout the year for easy compiling of data. But the 1099-K can give you a number to shoot for – if the numbers are off, you know there’s something wrong somewhere, which can save future headaches.
We recommend setting up a free Outright.com account and importing all of your income and expenses for the year. When you receive your 1099-K form in early February, you can see if the 1099-K matches up with the income you’ve recorded. After all, even the big payment processors can get it wrong sometimes.
What Do I Do if I Received Form 1099-K?
First of all, are you sure you’re getting the 1099-K in the first place? Not everyone does, and in fact only a certain percentage of small business owners and freelancers will get the form. There are two criteria for getting the 1099-K this February.
- You must have made at least $20,000 through the online payment processor
- You must have amassed 200 or more transactions through the online payment processor
If you haven’t met both of these criteria, you don’t get the 1099-K. If you made $20,000 but not through 200 transactions or vice versa you don’t have to look for the form in the mail early next year.
If you do meet the requirements though, keep in mind this form only reports how much you earned through the year. It doesn’t give you an idea how much you owe taxes on, as it doesn’t report deductions or anything else. The form 1099-K simply reports how much you earned in your business through that particular online payment processor. Nothing more.
This is also a great reason to keep accurate records of your business transactions over the years as you’ll need them to record deductions and expenses from your taxes. If you don’t, you may end up paying way more than you need to!
Have more questions about 1099-K? Ask your tax questions over at the Outright Community!
This guest post was brought to you by Outright.com, an alternative to Mint for business. Stop the paperwork madness! Use Outright to automatically pull your sales and expense information into one place for tax time.