In 2012 the federal government enacted a new tax law that required companies like StubHub, Amazon, and PayPal to track and prepare a 1099 for individuals who sell products or services online. Ecommerce business owners were required to report their income consistently with what was reported on the 1099-k form when they filed their taxes. Because last year was the first year sales of this nature were officially recorded by StubHub et al, the IRS may have been more lenient in their analysis of ecommerce business owner’s tax submissions. This year and each subsequent year, however, the IRS will be more serious in their investigations and ensure income is reported in a consistent way.
The Consequences of Ignoring a 1099-K
The IRS reported that they will meticulously analyze what you report in gross sales with what is reported by StubHub et al on your 1099-Ks. Discrepancies in reporting that reveal the gross sales you recorded during the year are less than what is recorded on your 1099-Ks will result in penalties. You may receive a letter requesting more information, the IRS may adjust the amount of taxes you owe, or you may even be audited. Small business owners who obtain an accounting certification will be best equipped for fully understanding the changes and reporting rules.
The Purpose of a 1099-K
In short there is just one reason the 1099-K is required: to report the income you made through online sales. In plain and simple terms, it records the revenue that you collected in sales during the year. It does not, however, reflect any expenses or deductions that you had to take in order to capture those sales. Items like chargebacks, shipping, and refunds reduce your profit but are not included in the 1099-K. Think of the data on the form as gross sales, and after you have offset your sales with expenses and other deductions you would be left with your net income. The amount reported on your 1099-K will always be higher than the actual amount of money that you made after expenses and deductions have been used to offset income.
Getting Tax Help
If you find that you’re experiencing difficulty arriving at gross sales that are above the amount that has been recorded on your 1099s you can get help from a small business tax preparation consultant. There are also online forums that can help answer general questions that you might run into if you decide to prepare and file your tax return yourself. The IRS website comes complete with guides and how-tos should you need additional assistance.
1099-Ks are the federal government’s way of ensuring you pay taxes on all the income you receive during the year, including any online sales. Do not ignore the form if you have received one. Instead, report it on your business tax return if you have a federal tax ID number or on a Schedule C if you are a sole proprietorship without a federal tax ID number. Following the tax protocol and carefully staying organized throughout the year will ensure you never run into problems with the IRS.
About Author: Evan Aoki is a feature contributor for Theprointern.com where he likes to report on subjects where life meets money.