What is this Form 1099-K I received?

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The post was originally published on Feb. 5, 2015, and was updated on Jan. 30, 2019. 

It’s tax season and that means that all manner of mysterious tax forms might begin appearing in our mailboxes. The tax forms that small business owners end up with can be even more perplexing — especially if you’re new to entrepreneurship. 1099-MISC? And what is this 1099-K form? What does it all mean? We’ve already covered the basics of the 1099-MISC  — the informational form that U.S. businesses are required to send to people they paid more than $600 for services during the last calendar year —  so now we’re going to cover Form 1099-K.

What is the 1099-K, who receives it, and what on earth do you do with it?

Related: 2019 tax calendar for small business owners

What is Form 1099-K?

Form 1099-K debuted back in 2012 when the government was attempting to find more funds (aka collect more taxes) after the 2008 financial crisis.

Third party payment processors such as PayPal, Amazon and Stripe are required to issue Form 1099-K to certain merchants who use those processors to process payments.

The government’s thinking went that perhaps merchants who used these third-party payment processors to collect money weren’t paying taxes on that income. These days, those third-party payment processors are required to send form 1099-K to both businesses using their platforms and the IRS.

In other words, form 1099-K is the government’s way of tracking how much money really passes through online payment processors such as PayPal, Amazon and Stripe.

Related: Calculating self-employment taxes

Who receives Form 1099-K?

Form 1099-K has been around since January 2012, but you might not have received it. That’s because you have to meet some specific criteria in order to get the form. Third-party payment processors are required to send form 1099-K to people who:

  • Made more than $20,000 in sales volume through that specific payment processor.
  • Made over 200 sales through that specific payment processor.

So if you only made $19,000 via PayPal, you likely won’t see a 1099-K from PayPal coming your way. Or if you provide a service that garnered income of $100,000 — but that income was spread out over only 100 Stripe transactions — you likely won’t see a Form 1099-K coming from Stripe either.

Keep in mind that if you’re going to receive Form 1099-K, it was supposed to arrive to you by January 31. Third-party payment processors are allowed by law to send the form to you electronically or by mail.

Editor’s note: If you’re planning to sell products or services on your own website, consider an all-in-one eCommerce solution like GoDaddy Online Store  to make collecting sales taxes easier. You can choose your customers’ tax percentage by country or region and, in some cases, by state or province as well. In most cases, you only need to set this option one time.

What should you do with Form 1099-K?

If you do receive Form 1099-K, the first thing you should do is compare it to your own financial records. It isn’t unheard of for payment processors to make a mistake. If they accidentally report to the IRS that you made more money than you actually did, you could get stuck on the hook paying taxes on money you didn’t actually earn!

To check form 1099-K against your bookkeeping records within GoDaddy Online Bookkeeping:

  1. From your dashboard, click your Income tab.
  2. Select the dates you wish to see. For tax year 2018, that would be Jan. 1, 2018, to Dec. 31, 2018.
  3. In the All Accounts drop-down menu, choose the third-party payment processor that sent you the 1099-K.
  4. Select Sales in the All Categories drop-down menu.
  5. Click Filter.

This will show you exactly how much you collected in sales from that payment processor over the past year.

Before you worry if this number doesn’t match, keep in mind a couple of things. Form 1099-K only takes into account your gross sales. For that reason, it doesn’t consider or report:

  • Fees (i.e. PayPal fees, marketplace fees, etc.)
  • Refunds and returns
  • Shipping and postage
  • Business expenses like packaging supplies, etc.

If you determine that your 1099-K is incorrect, contact the third-party payment processor that issued it immediately. If you’ve determined that your 1099-K matches your own records, then put it up for safekeeping. This is an informational return, so there’s no need to do anything else with it. Your payment processor has already sent it on to the IRS.

Related: IRS FAQs on payment card and third-party network transactions

What will the IRS do with Form 1099-K?

Form 1099-K is supposed to ensure that we’re all paying our fair share of income tax. So if a third-party payment processor reports that you made $75,000 in income, while you tell the IRS you only made $74,000 in income, you need to have the financial records and documentation ready to back up any discrepancies. Otherwise your tax return could be red-flagged for further scrutiny.

That is, again, why it’s such a good idea to use a service like GoDaddy Online Bookkeeping, which integrates all of your financial accounts and lets you easily keep track of the fees, shipping charges and other business expenses that the 1099-K cannot and does not take into account.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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