1099-K: Will You Receive this IRS Surprise in Your Mailbox?
When it’s time to do your taxes for your business, the last thing you want is a big surprise. The tax season is stressful enough without something else coming in at the last minute and messing all your numbers up!
Unfortunately, you may indeed get a surprise this February when you get the 1099-K tax form in your mailbox. If your taxes weren’t confusing before, now you have this dumb thing to contend with! Why does the IRS insist on making your life difficult?
Luckily, the 1099-K isn’t the usual crazy form you get in the mail from the IRS. This form actually has some benefits to it and isn’t all that complicated. Here’s a brief overview of what to expect.
The 1099-K is a form that the IRS uses to track how much income online sellers made through online payment processors like PayPal. This is also why the form has been called the “PayPal 1099” in the past.
The U.S. has always faced a “tax gap,” i.e. the difference between how much income citizens were actually making and how much they reporter to the IRS. With the advent of electronic payments, like PayPal, it was easier than ever for people to get paid but fail to report income on their income taxes. (A lot of this was even unintentional – we often run into new online sellers who don’t realize that they are operating a taxable business!) The 1099-K, much like the form W-2 or the 1099-MISC you’d receive if you work as a contractor, is merely the way that the IRS requires online payment processors to report your income.
What’s On Form 1099-K?
So if the form is just for tracking money, what’s actually on the form? Well, that’s the thing – that’s all there is on the form, how much you made through online sales. It doesn’t show anything about your expenses, refunds or any other useful information that will lessen your tax liability (i.e. taxes owed). It’s literally just how much you made through PayPal or other online payment processor.
This means when you do your taxes, you still have to figure out things like business expenses and the like. None of that is reported on the 1099-K so you’re still responsible for figuring out how much you REALLY owe. If you don’t report your expenses to the IRS on form Schedule C along with your annual income taxes, you could be hit with a hefty tax bill. If you haven’t been tracking expenses this year, we recommend you start a free Outright account right now in order so you don’t end up paying more than you owe!
One caveat: Did you know you may not actually get the 1099-K? There are two criteria you must fit to get the form; otherwise, you’re out of luck. For one, you must have made at least $20,000 in the taxable year. Secondly, you must have made that $20,000 in 200 transactions or more. If you don’t fit both of those, you won’t get a 1099-K in the mail in February.
What To Do with the 1099-K?
If you do end up getting the 1099-K next year, try not to freak out too much. Since the form is purely informative, there isn’t much more for you to do. Verify the number is correct with your own calculations (just in case) then go about inserting the information on your tax forms. That’s really about it!
Of course it’s always a good idea to keep any tax forms around for a few years just in case something is misreported or there’s an error. Also, you should look out for the 1099-K from now on; this isn’t a one-time thing. But now that you know how to handle it, the form should be no sweat.
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Images Money & Image original source: TaxFix.co.uk