The PayPal 1099-K: Don’t Fear It
The Etsy discussion boards and forums have been alight with talk about something called the “PayPal 1099”. Some Etsians expressed confusion about what the form is and why it matters. Others knew what it was, but didn’t know what to do with it. We, at Outright, thought we’d give you the full scoop so that you can have the answers you need. (Outright is a free online bookkeeping tool that imports all of your data in one place so that you can see how your Etsy business is doing.)
Beginning in January 2012, companies that process credit and debit card transactions will be sending out a new tax form called the 1099-K. For Etsy sellers, that form will come from PayPal, since PayPal processes transactions for Etsy sellers. The new Form 1099-K will report the money Etsy sellers received through PayPal for all of 2011. This form will only be sent to sellers who process over $20,000 in goods and services sales AND complete 200 transactions.
In a nutshell, the 1099-K from PayPal and other merchant processors will report to the IRS and to you directly how much money you made in 2011! But, what the IRS won’t automatically know is how much you spent to keep your business running. This is why it is now more vital than ever for Etsians to record every single business expense, from shipping to COGS to PayPal and Etsy fees, in order to minimize your taxes. After all, you only pay taxes on your profits (revenues minus expenses), not your revenues only.
Here are some recommendations for Etsians:
Not sure if you’ll receive a 1099-K?
You can sign up for a free Outright account, connect it to your PayPal account, and you can easily see what you revenues for the year are. If it’s over $20,000 and you have more than 200 transactions, you will receive one.
Think you will receive one, but not sure what to do?
The form will arrive in your mailbox (and at the IRS) in early February. You’ll want to verify the accuracy of the revenue numbers reported on the form. Outright can do that for you if you sign up for a free account. You will want to make sure that the amount you report on Schedule C, Line 1d is the same or more than the total amount on your 1099-K form. Don’t worry if you have no idea what Line 1d is - just take note of this recommendation and double check it before filing your taxes. Finally, you will want to make sure you have captured and have record of all of your expenses. Whether you use Outright, a spreadsheet, or another tracking method, this is a good thing to do anyways, regardless of the form!
Don’t stress too much over the new 1099-K form. It is really just an extension of the other information you already receive every year. Just be sure to check the information on the form to insure you have properly recorded all of the credit card receipts your business receives. For everything you ever possibly wanted to know about the PayPal 1099, check out our 1099-K Tax Resource Center or this January 2013 refresher on the 1099-K.