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What You Need To Know About The New 1099 K

The internet has given rise to many new business opportunities for entrepreneurs everywhere, and if you make a significant amount of income from selling on sites like eBay or Amazon, you may have heard about the new 1099-K forms issued for online sales, sometimes called the PayPal 1099-K. It's important to understand how these tax forms work, and who will receive them, in order to keep your IRS filings manageable at the end of the year.

What is the 1099-K?

Many people who work as independent contractors, or who are involved in freelance work are familiar with the 1099-MISC forms. These documents are issued to individuals who receive income from a source besides an "official" employer for tax purposes. More "traditional" employees have taxes taken out of each paycheck by an employer, which may include federal and state income taxes, Social Security and Medicare contributions. Independent contractors who make money but set their own schedule and do not receive a traditional paycheck don't have these taxes taken out of their income. The 1099-MISC form is intended to let the Internal Revenue Service (IRS) know how much income you received so they know how much you owe in taxes at the end of the year.

With the rise of online auction sites and the ability to make a significant income as a "power seller" on sites like eBay or Amazon, there are many people whose income is not reported through the existing system of 1099-MISC forms. In these cases, the seller receives income from hundreds, thousands, or even millions of different customers through online transactions, and the IRS is concerned that these sellers are not properly reporting their full income at tax time.

As a result, the IRS introduced the 1099-K beginning in tax year 2011. The form is issued by third-party payment processors (banks or PayPal, for example), and reflects the volume of transactions processed for the year. Not everyone who sells online will receive a 1099-K, they are specifically reserved for individuals who have a high enough sales volume to consider it a source of income.

Who will receive a 1099-K?

There are sales volume and transaction requirements that you must meet in order to receive the 1099-K, so a casual seller trying to get rid of some of junk from the attic won't necessarily meet the requirements. However, sellers that participate in more than 200 transactions, amounting to over $20,000 in sales volume during the year should expect to see one (both requirements must be met in order to receive the form).

How does it affect my online sales business?

If you are only processing a small volume of sales each month, you probably will not be affected by the new IRS requirements. In some cases, payment processors are exercising extreme caution in requiring tax information from businesses who may potentially get close to the threshold, so they are not caught without the requisite information come tax time. PayPal, for example, identifies several factors that could indicate a seller will reach the minimum volume, including historical sales data, growth trends, and other related accounts. Be prepared to furnish information like a Taxpayer Identification Number (TIN) if your payment processor asks.

Are there other implications for tax filings?

Some online sales income is already reported to the IRS through 1099-MISC forms. However, the third-party processing system that issues a 1099-K will not have access to information about which transactions are already reported through 1099-MISC forms, so there is a potential for double-reporting. In these cases, it's important to keep a record of which companies issue a 1099-MISC, then cross-reference that information with what is reported on your 1099-K.

If you operate an online sales business and process payments through third-party processors such as PayPal, it's important that you prepare meticulous tax information, including profit and loss statements, sales data, and income information. The information will prove valuable if you receive a 1099-K and must include that on your taxes when you're ready to file.

About Author Nathan Roberson :

If you operate an online sales business and process payments through third-party processors such as PayPal, it's important that you prepare meticulous tax information, including profit and loss statements, sales data, and income information. The information will prove valuable if you receive a PayPal 1099-K and must include that on your taxes when you're ready to file. To find out more, visit <a href="" target="_blank"></a>

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Article Added on Thursday, April 17, 2014
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