February 9, 2012 by Jennifer Escalona Dunn
By now most eCommerce sellers are familiar with the new tax form 1099-K. Most of us should have the 1099-K in our hot little hands by now. But that begs the question – what exactly do we do with this new tax form?
At Outright, we've talked to lots of sellers while building this and noticed the same questions coming up again and again. Here are the most common:
What exactly does my 1099-K show?
Your 1099-K shows your gross sales. “Gross sales” includes all of your selling transactions, meaning the totals of all of your sales. eBay and PayPal fees are NOT taken out of the gross sales number. Refunds and returns are also NOT deducted from your gross sales number. Shipping revenue is also included in that number. That’s why the number may seem a bit higher than you were expecting.
This is another reason why it’s so important to track all of your expenses. Of course you charged your buyers for shipping, but you also paid for shipping when you actually shipped the item. If you don’t track those shipping expenses though, the IRS simply sees that you pocketed all of that money you collected for shipping fees, and they’ll require that you pay taxes on it!
Furthermore, you should have other business expenses. You likely paid eBay and PayPal fees, bought supplies, business cards, advertising, etc. And perhaps you used a portion of your home as a home office and qualify for the home office deduction. With the 1099-K, the IRS sees all the money you took in. But it’s your job to show them all the money you also spent.
Does my 1099-K account for returns and refunds?
Your 1099-K does not account for returns and refunds. In other words, the 1099-K shows that you made that money even when you ended up refunding the money to the customer. This makes it all the more important for you to have meticulously tracked your finances, since these amounts will likely reduce the amount of taxes you owe.
What goes on Schedule C Line 1d?
There has been quite a bit of confusion about Schedule C line 1, (2012) but the most important thing to remember is that the amount on Schedule C Line 1 should be equal to or greater than the total amount found in box 1 of your 1099-K form(s).
Why the confusion? Schedule C line 1 instructs us to enter a “0” amount for merchant card and third party sales for the year 2012. This is, of course, the information found on the 1099-K. But this doesn’t mean that you can discount the 1099-K. The IRS still has a record of the money you made through PayPal, credit cards, Amazon and other payment processors; they simply do not require you to enter that amount on line 1a this year. If you don’t remember anything else about your Schedule C and 1099-K this year, remember this:
The amount you enter on Schedule C Line 1d should be equal to or greater than the total amount found on your 1099-K form.
Thanks for the warning, but what happens if Schedule C line 1d is lower than the amount found on your 1099-K?
Every year the IRS compares the amount of income you reported with the amount that others reported for you. These reports to the IRS could come in the form of your W-2, form 1099, or form 1099-K, among other things. The IRS computers compare what you reported against what others reported for you. If there’s a discrepancy, they will notify you that you owe money. This could also lead to penalties and fees, and you don’t want that!
To be on the safe side, always report all income. Again, to reduce taxes, make sure you have recorded each and every one of your business expenses.
Still confused about 1099-K or business taxes in general? Check out the Outright Tax Center for more than you ever possibly wanted to know about your business taxes!