Running a small online business is a great way to make a living. And with small business tools like PayPal, it’s never been easier to accept payments from buyers all over the world. However, there are a few tax-related complexities involved in receiving payments via third-party payment processing companies.
When it comes to taxes, there are a lot of different forms that must be saved and filed each year. For example, employees receive a W2 form that records the sum of their annual wages, while independent contractors receive 1099-MISC forms from their clients. In recent years (ever since 2011), the IRS has asked online sellers to start using a new type of form (the 1099-K form) to report income earned via third-party payment processing services such as PayPal. We know there’s a pretty good chance that you aren’t familiar with the 1099-K form, so below you’ll find some of the most important questions and answers.
What is the 1099-K?
The 1099-K is an income reporting form used by the IRS. Payment processing services, such as PayPal, are required to issue a 1099-K form to the IRS for reporting the sales of their customers (businesses) who receive more than $20,000 in a single year AND who conduct more than 200 transactions. So if your business gets income from several different sources – like PayPal, checks, and cash – you might not need to report a 1099-K form unless you earn more than $20,000 via PayPal or another merchant transaction processing service.
Who manages the 1099-K? Is this something I have to do myself?
PayPal and other payment processing services track your annual payment volume and will issues the 1099-K form for you. The only thing that you have to do to ensure you receive a 1099-K form is keep your PayPal account updated with your correct business name and TIN (Taxpayer Identification Number).
Why is the IRS requiring 1099-K forms?
The IRS is trying to make sure that small business owners are fairly and accurately reporting their income (a.k.a. “not cheating on their taxes”). As long as you have been truthfully reporting your annual income each year, the 1099-K form should not create any hassles for you.
What if some of my income gets double-reported? If that happens, will the IRS audit me?
This is a valid concern; some small business owners receive a 1099-K form that also reflects income that was already reported on the 1099-MISC forms that they received from their clients.
For example, if you are a freelance writer, graphic designer, or consultant who accepts payments via PayPal, this could happen to you. Over the course of the year, let’s say that you have 4 different clients who paid you $10,000 each via PayPal via 52 weekly installments. This would give you $40,000 of annual PayPal income, with 208 annual transactions, which would put you over the limit that requires a 1099-K form to be issued.
However, a complication can arise if any of your clients also issued you a 1099-MISC form. If that is the case, the IRS could view your income from these clients as $80,000 instead of the $40,000 that it actually was, and this could get you flagged for an audit.
Talk to your accountant if you are concerned that some of your business income might be getting “double-reported” in this way. You might need to talk to your clients and ask them not to submit a 1099-MISC if they are already paying you in such a way that the income gets reported via 1099-K – or you might want to stop taking PayPal payments from those clients and ask them to pay you via check instead.
At the very least, be sure to keep all copies of your 1099-MISC forms as well as your 1099-K form. That way, if needed, you can reconcile any differences and prove that you were accurately reporting your income on your tax returns.
Selling online is still remarkably convenient and efficient, even if there are a few tax-related complications that arise along the way. The rules can be hard to understand, so ask your accountant about any questions that you have. And most importantly, be prepared be prepared to talk to your clients about changing your payment arrangements.
Will your business fall under the 1099-K form requirements? Tell us in the comment section below.