Did you recently receive a 1099-K tax form and had no idea what to do with it? You’re not alone!
The new form, called 1099-K, Merchant Card and Third Party Network Payments, is to report any payments you received in 2011 by credit or debit cards or through third-party electronic networks such as PayPal.
And you can thank the Housing Assistance Tax Act of 2008, which included a much-unnoticed blurb that — beginning in tax year 2011 — required banks and other payment processors to send data on the payments they make to online merchants to the IRS. The government was afraid some folks were not reporting their online income (imagine that!), and created Form 1099-K to make “volunteer” reporting easier.
Consequently, if you sell anything online and process your payments through a company like PayPal, you need to keep very good records.
So, don’t discard that 1099-K, or you can bet Uncle Sam is going to come calling.
You might want to note that some online merchants have found discrepancies between the reporting on the 1099-K and their own records. Most disagreements are related to how you record your payments and expenses — either cash (recorded on the date payment is received) or accrual (recorded when income is earned).
For instance, I read one article about Amazon (NASDAQ:AMZN) in which the seller objected to Amazon using date of sale vs. shipment date to record revenues. Consequently, you or your accountant might need to make some adjustments to ensure you are reporting your income correctly.
Since most taxpayers had no prior knowledge of the 1099-K, you might have to work out a few kinks for this reporting season. But now that you know, you can set up your accounting system so next year’s reporting of your online revenues will be a breeze!
For more information on the form, visit Understanding Your 1099-K.