What is IRS Tax Form 1099-K

The new IRS tax form 1099-K, Merchant Card and Third Party Payments, is going to be the talk of small business circles shortly as online payment hubs such as Paypal and Google checkout begin to comply with IRS 1099-K data collection requirements regarding credit, debit and e-Check transactions processed through their systems.

What Is the Purpose of the 1099-K?

Starting on January 1, 2011, online checkout services are required to maintain a record of the number of transactions processed through your individual account as well as the dollar amount assigned to each of these payments. When your transaction number crosses 200 and has an assigned dollar value of $20,000 or more, the checkout service must send you a 1099-K at the beginning of 2012 as well as transfer the same information to the IRS, thereby reporting your income through their service.

What Does the 1099-K report, gross sales or net sales?

When the IRS receives the information on your 1099-K, they will have the total dollar amount brought into your online account from payments received. This amount will not factor in that a portion of the money brought in from online sales on sites such as eBay is immediately spent on shipping costs, Paypal fees or eBay fees, it is a total gross report.

Do I Have to Pay Taxes on the Gross Amount Reported on the 1099-K?

The 1099-K is merely going to eliminate the honor system for mid to high volume sellers on online marketplaces. If you have consistently been reporting all of your online sales, large or small, on a Schedule C Sole Proprietorship form, the 1099-K is merely going to provide you with the gross amount you begin with when factoring in your deductions.

After you have calculated your individual deductions such as office use of your home (if applicable), equipment costs, postage costs, eBay fees, Paypal fees and any applicable deduction for business use of your vehicle as proven by a mileage log, you will pay actual income taxes and self-employment tax on the net-income. If you have a personal income tax plan set-up where you already pay an estimated tax payment quarterly, then your taxes will be affected by the 1099-K in terms of paperwork only.

The main thorn of the 1099-K tax form will pierce the sides of small businesses that have been operating online for years without reporting their income and any associated deductions accurately. Business owners who maintain clean, accurate records and file all income with the IRS will only be inconvenienced by having to wait for the arrival of the form prior to filing their taxes.

Sources:

Personal experience as an e-commerce business manager for five years.

IRS Form 1099-K. IRS.gov.

Ina Steiner. "Paypal Readies for IRS 1099-K Reporting Requirements". Auction Bytes.