Did You Receive Form 1099-K? Don't Panic... Here's What You Do With It
If you have a small business or do freelance work online, you may have started receiving a new and unexpected form at tax time. But, Form 1099-K may look and sound more complex than it is, so here's a short guide to what to do with it.
What is Form 1099-K?
Simply put, this is a new informational form that the IRS began requiring in 2012. It's generally issued by companies that process payments on credit cards or through payment services (such as PayPal). If a company processed payments for and individual or a business that totaled $20,000 or more and resulted in at least 200 transactions, that payee should receive Form 1099-K detailing those amounts. If you get one, use it to complete your personal or business income tax returns.
The intent of this form is to help ensure that those who receive payments using third-party processors (usually credit card companies and online payment methods) properly report all their income.
What do You Do With It?
If you receive Form 1099-K, check it against your business or income records to determine if the amount reported is correct. Note that the income reported should be a "gross" amount, and you may have actually logged smaller income if fees were taken out before you received the money. You will report those fees separately as an expense on your income tax returns (such as on Schedule C, Line 10). If you show a different amount of payments processed through that particular vendor, work with the issuer to clear up the discrepancy. Once you confirm that the amount is correct, you would include the income on your tax documents.
If you only received payment -- such as by freelancing for a business that only pays through PayPal or selling goods through one online site, such as Etsy), you may find that this is your total income and provides an easier way to track your income each year. However, if you receive money through any other source (such as cash sales or multiple online payment methods), you may need to simply ensure that this income is included as part of your overall gross income (typically on Schedule C, Line 1). Typically, you wouldn't report less income than at least what's on your 1099-K.
What Cautions Should You Know?
There has been some confusion about the way that Form 1099-K overlaps with reporting requirements for Form 1099-MISC. Generally, if you receive more than $600 from any business, they are required to issue Form 1099-MISC to report these payments. In addition, your third-party payment processor may also be required to send Form 1099-K. This means that you may receive both Form 1099-MISC and Form 1099-K from some companies... for the same payments. What should you do?
If you experience this double-reporting problem, simply report your income accurately per your complete records. You may receive an automated notice from the IRS stating that you underreported your income. If you do, call or visit the IRS to say that part of your income was reported twice due to these forms. They should give you instructions on how to provide evidence proving that this is the case. If you're unsure how to handle the double reporting issue, you may want to work with a professional tax preparer or accountant.
Whether you're working freelance or running your own small business, you have the chance to follow your dream and control your own destiny. And, although you may have to navigate new and unfamiliar tax situations, the benefit often outweighs the inconveniences. For more information, contact companies like Balkcom Pearsall & Parrish CPA's PA.