If you sold tickets or made other payments through an online platform like PayPal, Etsy, Airbnb, etc., you may receive a Form 1099-K reporting your gross sales for the year. This form is required to be sent to you and the IRS if you meet certain thresholds for payment volume received through third party payment networks. Here are some key things to understand about 1099-K reporting:
What is Form 1099-K?
Form 1099-K, also known as the Payment Card and Third Party Network Transactions report, is a tax document you may receive if you received payments through a third party payment network like PayPal, Venmo, Etsy, Airbnb, eBay, etc. It reports the gross amount of payment card/third party network transactions you received during the year.
When will I receive a 1099-K?
You will receive a 1099-K if you meet both of these criteria:
– You received payments for goods or services through a third party payment network.
– The total gross amount of payments you received exceeded $20,000 and your transaction count exceeds 200 transactions for the calendar year.
So if you sold through PayPal, for example, and received more than $20,000 in gross payments via 200 or more transactions, PayPal is required to issue you a 1099-K documenting those sales.
What payments/transactions are reported?
Reported transactions include:
– Sales of goods or services
– Rent payments
– Fees you collected
– Other gross payments received for using the third party payment network
What payments are NOT reported?
Certain transactions may be excluded, such as:
– Personal transfers between accounts
– Returns and refunds
– Adjustments for credits or fees
– Cash advances or loans
– Insurance premiums
– Payments made outside the payment network (like offline cash/check payments)
So the 1099-K focuses specifically on gross sales/payments made via the third party payment processor.
How 1099-K Affects Your Taxes
Receiving a 1099-K has implications for your tax reporting and paying income tax on your earnings. Here’s how it affects your taxes:
You must report 1099-K earnings
The IRS receives a copy of every 1099-K issued, so you must report the income shown on the 1099-K on your tax return. Failure to do so could lead to an IRS audit and penalties for underreporting income.
1099-K shows gross sales, not profit
An important distinction is that the 1099-K reports your total gross sales. It does not reflect any business expenses, fees, refunds, cost of goods sold, or other deductions that would reduce your net profit amount.
You deduct business expenses/costs
To calculate your net business earnings, you deduct legitimate business expenses from the gross amount shown on 1099-K. Things like fees paid to the payment processor, shipping costs, refunds, and cost of goods sold will lower your net profit margin. Proper documentation is needed for these deductions.
You may still owe income taxes
Even with deductions, you will likely still have taxable net profit that is subject to federal income tax as well as state income tax if applicable. Schedule C and Schedule SE are used to report and calculate this tax liability.
Quarterly estimated payments may be required
If the income from your 1099-K is significant, you may need to make quarterly estimated tax payments on your self-employment earnings to avoid penalties at tax time. The IRS requires this if you expect to owe $1,000 or more in taxes for the year.
How to Report 1099-K Earnings
Here are some steps to take to properly report your 1099-K income:
Step 1: Review Form 1099-K
– Verify the information shown is accurate. Notify the issuer if any information appears incorrect.
– Total the amounts shown in Box 1a (gross sales) and Box 1b (transactions).
Step 2: Gather related documentation
– Sales records/receipts
– Invoices issued
– 1099-Ks from other payment processors (if applicable)
– Business expense records
– Bank and credit card statements
– List of all equipment, assets purchased for business
Step 3: Report income on Schedule C
– Use Schedule C (Form 1040) to report your sole proprietor business income and expenses.
– 1099-K Box 1a amount gets reported on Schedule C, line 1.
– Tally all other 1099-Ks and income from the business activity.
Step 4: Deduct related business expenses
– Use Schedule C, lines 8-27, to detail expense deductions like fees, supplies, etc.
– Take deductions for cost of goods sold, if applicable.
– Total deductions on Schedule C, line 28.
– Net profit/loss amount is calculated on Schedule C, line 31.
Step 5: Compute self-employment taxes
– Use Schedule SE (Form 1040) to calculate self-employment tax liability.
– The net profit amount from Schedule C flows through to Schedule SE.
– Self-employment tax of 15.3% is calculated on Schedule SE and gets reported on Form 1040.
Step 6: File income tax return
– Report Schedule C income, deductions, and net on Form 1040.
– Compute income taxes owed on total income from all sources using Form 1040.
– Claim applicable deductions and credits to reduce tax amount.
– Self-employment taxes from Schedule SE also get reported on Form 1040.
– File Form 1040 and related schedules with the IRS by tax deadline.
Example of Reporting 1099-K Income
Here is an example to illustrate how to handle 1099-K reporting:
John received a 1099-K from PayPal showing the following amounts:
Box 1a: Gross payments processed: | $42,000 |
Box 1b: Total transactions: | 289 |
These payments were for ticket sales through an online auction business John operates.
John would take the following steps to report this 1099-K income:
1. Verify the 1099-K amounts received from PayPal are accurate.
2. Gather John’s records of ticket sales, fees, expenses, and other documentation related to the business.
3. Report the $42,000 from Box 1a on Schedule C, line 1.
4. Deduct related business expenses, let’s say:
– PayPal fees: $1,200
– Website hosting fees: $500
– Advertising costs: $800
– Cost of tickets sold: $22,000
– Office supplies: $100
5. John’s net profit on Schedule C, line 31 would be $42,000 – $24,600 = $17,400.
6. John calculates self-employment taxes of 15.3% x $17,400 = $2,662 on Schedule SE.
7. On Form 1040, John reports:
– Schedule C net profit of $17,400
– Schedule SE tax of $2,662
And calculates total income taxes owed.
By properly reporting the 1099-K earnings and deductions, John reports the correct taxable business income.
Key Takeaways
– Expect a 1099-K if your gross third party payment transactions exceed $20,000 and 200 transactions.
– The 1099-K shows gross sales. You deduct related expenses and costs to calculate net taxable profit.
– Report 1099-K Box 1a amounts on Schedule C line 1.
– Self-employment taxes apply to net Schedule C income.
– Owing income taxes on net profit is likely, making estimated payments prudent.
– Save documentation to support income, deductions, and expenses reported.
– File Schedule C, Schedule SE, and Form 1040 to report and pay taxes on 1099-K earnings.
Conclusion
Receiving a 1099-K for your online sales or other payment processing transactions creates some additional tax reporting requirements. But by understanding what gross amounts the 1099-K covers, properly deducting your related business expenses, and completing the appropriate IRS schedules and forms, you can accurately report and pay income taxes on these earnings. Keep detailed records and report amounts accurately to avoid issues or penalties for underpayment down the road. Reach out to a tax professional for assistance if you need help with 1099-K reporting.