Paperwork: An entrepreneur’s nemesis.
Nobody likes spending countless hours hunched over a desk, mashing calculator buttons and scribbling in figures and checkmarks, but here’s some advice for young entrepreneurs: It’s a necessary evil. Especially when that paperwork directly relates to your money. In that case, you better brew another pot of liquid energy because the feds are going to pay closer attention to one key tax form for sales derived from online transactions.
Income.com wants all small-business owners to be aware of the proper filing and documentation of 1099-K forms, because the U.S. Internal Revenue Service (IRS) is clamping down on the proper procedure for online sale revenue reporting.
While some entrepreneurs may think 1099-K refers to a distant planet, the seriousness of compliant form completion cannot be understated. If you want to make money online and steer clear of federal scrutiny – which just about everybody wants to – then listen up and understand what the form is, what it relates to, why it matters and how you can best protect your business by using the form correctly.
The basics of the 1099-K
Introduced in 2011, the 1099-K is “an information return that reports payment card and third-party network transactions,” as the IRS succinctly puts it. Under federal laws, third-party payment service providers like Amazon, PayPal and Square are required to send 1099-K forms to every merchant that uses their services with 200 or more transactions annually and collects at least $20,000 from online sales.
If your business fulfills both volume and value requirements and you receive a notice regarding your 1099-K, it is because the IRS believes you may have underreported on your gross receipts.
After the advent of third-party electronic payment processing and the ecommerce boom, the IRS moved to close the so-called revenue gap. Its primary enforcement measure in this pursuit? The 1099-K, which is hugely important now, as you’ll see below.
Why the IRS is focusing on it
The reason the 1099-K is important is because the IRS pulled a quick flip-flop. After it first issued the form in 2011, the newness of the form and confusion relating to the reporting methods led the IRS to announce it was going to give entrepreneurs a “get out of jail free” card in the event of mistakes. However, the agency reversed course rather quickly and said it would in actuality pay stringent attention to 1099-K forms.
“Last year what they said was that it’s the first year of the form, so they weren’t going to use that data,” Steven Aldrich, CEO of internet bookkeeping service Outright, told Ecommerce Bytes. “Now they’ve said the first year’s under our belt, let’s go ahead and use this data to make sure the information’s accurate and complete. They’re going to plan on using it this year to ensure that businesses are reporting their revenue accurately.”
Whereas merchants might have been given a pass before, the IRS will be closely reviewing gross revenues small-business owners report in accordance to the transaction volume and value totals they state on 1099-K forms. Those with a revenue less than what they and their payment provider filed might find themselves the subject of an audit, Aldrich warned.
How to properly fill out the 1099-K
Caution ahead: Filling out the form is not as easy as plugging numbers for your gross sales. Aldrich notes that payment processors only report gross transactional values, not net. Meaning: refunds, shipping costs, sales taxes and other adjustments that might be deducted on a tax return must still be reported on the 1099-K.
“The tricky thing there is just the amount that’s generally recorded on the 1099-K is, from the seller’s perspective, probably different from what they would normally expect to get from a PayPal or another processor,” Aldrich told Ecommerce Bytes. “There’s still a fair amount of confusion among small businesses about how the number’s derived, how they can cross-check that number.”
The IRS maintains a best practice guide to correct 1099-K completion and Aldrich recently wrote a blog post on his company’s website that outlines how to fill out the form. Once again, the form can be a little tricky, and you’ll need to pay extra attention to each piece of information the IRS requires for 1099-K completion.
Income.com knows there is a lot of money flowing through electronic channels now and small-business owners need to get on top of their ecommerce game if they want to profit off the rise of the digital consumer. At the same time, it’s crucial to ensure your reporting methods are up to snuff and you understand the 1099-K form and what it entails. If your online sales surpass the threshold for volume and value, you’ll need to report. Keep a close eye on how you do so, because rest assured, the IRS will be putting it under a microscope.