Just the thought of taxes is enough to send many e-commerce business owners into a panic. Smaller e-commerce companies often lack the budget for accounting support, and it can be stressful trying to navigate business taxes on your own. After all, making mistakes on your tax return can have serious consequences, such as audits or penalty fees.
A good place to start overcoming your tax stress and confusion is to learn about the different IRS forms your business may need. To get you started, we’re going to focus on one of the IRS forms that often confuses e-commerce business owners — the 1099-K.
We’ll answer these common questions about the form:
- What is 1099-K?
- Who needs a 1099-K?
- How do you avoid double reporting with form 1099-K?
- Why doesn’t your 1099-K match your income records?
- What do you do if your 1099-K is wrong?
Table of Contents
What Is a 1099-K?
A 1099-K, also called Payment Card and Third-Party Network Transactions, is an IRS form that identifies purchases made with payment cards, such as debit or credit cards, or any payments processed through third-party merchants such as Venmo.
These third-party merchants are referred to by many different names. You may know them as payment settlement entities (PSE), payment service providers (PSP), or payment processors. For clarity and consistency, we’ll refer to this type of entity as a payment service provider or PSP throughout the article.
PSPs use form 1099-K to report to the IRS any purchases you processed through their services. According to the IRS, this helps them “improve voluntary tax compliance.” Form 1099-K lets the IRS know whether you have reported all of your taxable income.
Form 1099-K is informational. The revenue reported on this form is already accounted for in your gross income, and you don’t have to submit the form when you do your tax return. When you receive your 1099-K, check the information against your records and then file it with your other supporting tax documents, such as receipts and invoices.
Who Needs a 1099-K?
Whether your business operates on an e-commerce platform or through a brick-and-mortar store, you may meet the criteria for a 1099-K.
If your business accepts digital or card-based payments for goods or services, this money is processed through a payment service provider before it lands in your bank account. A PSP sends you a 1099-K if you meet these requirements as stated by the IRS:
- Tax returns for calendar years prior to 2022: You received gross payments that exceeded $20,000, and you had more than 200 transactions.
- Tax returns for calendar years after 2021: You received gross payments that exceeded $600, and you had any number of transactions.
For tax return years prior to 2022, the criteria are gross payments of more than $20,000 and more than 200 transactions. Starting with your 2022 tax return, you’ll receive a 1099-K if your gross payments are more than $600.
The dramatic change in gross payment criteria is due to the increase in gig economy workers. The IRS wants to ensure that everyone reports their full earnings, whether they own a small business or have a seasonal side hustle.
There’s no need for you to request form 1099-K from your PSP. If you meet these requirements, you’ll receive the form automatically for the previous tax year by January 31 or the following business day, if the 31st falls on a weekend or holiday.
If you haven’t received a 1099-K and think you should have, it’s likely because your payments were split across different PSPs. For example, in 2022, if you collect $300 in business payments from PayPal and $500 from Stripe, neither PSP sends you a 1099-K because you haven’t reached the $600 minimum with either of them. Even if you don’t hit the requirements to receive a 1099-K, you must still report all PSP-processed payments as part of your gross income.
If you’re certain you should have a 1099-K and haven’t received it by the deadline, contact your payment service provider to let them know you need this form. You can still accurately file your tax return without it, but when it comes to business taxes, it’s always best to have everything documented.
How to Avoid Double Reporting With a 1099-K
The most common mistake e-commerce businesses make with form 1099-K is double reporting income. When you double report income, you pay double the taxes, so this is a mistake you want to avoid at all costs.
Reporting income twice accidentally is easy to do with form 1099-K since you also have other records that show the money from these purchases. This could be in the form of receipts, records from your invoicing software, or from another tax form, such as a 1099-MISC.
To get a clearer idea of how this mix-up happens, let’s look at an example. Imagine you own a small business where you act as a design consultant, and you use accounting software that allows clients to pay invoices online using Stripe as a PSP.
When your clients pay the invoices, the money is recorded in your invoicing software as part of your gross income. If you meet the minimum transaction requirements we discussed earlier, you’ll receive a 1099-K from Stripe that documents these same payments.
If you add the amount from the 1099-K to the gross income reported by your accounting software, you’ll be double reporting income. It’s very easy to make this mistake if you’re not familiar with a 1099-K since the form indicates it’s a record of payments made to you.
Remember, form 1099-K is just for your records. The income shown on this form is the same money that is already reflected in your gross income.
Why Doesn’t Your 1099-K Match Your Income Records?
Payment service providers only report your gross income, meaning they don’t account for things such as sales tax, shipping fees, refunds, or other deductions you might have taken. When comparing your 1099-K to your income records, be sure to look at your gross income, not your adjusted gross income or net income.
You may also see a discrepancy between your records and the 1099-K due to the way transactions are reported. PSPs report income based on the transaction date, whereas business owners tend to report based on the date they received the money. These misaligned dates can sometimes cause confusion when you compare your income records to your 1099-K, so keep this in mind.
While the IRS doesn’t require you to reconcile your gross income to your 1099-K, it’ll ask for an explanation if they think your self-reported income is too low. No one wants to owe the IRS an explanation, but if you do, collect your income records that show you reported the correct amount. It’s a stressful position to be in, but it can be cleared up quickly with the right documentation.
What Do You Do If Your 1099-K Is Wrong?
It’s essential that you keep meticulous business records so that you can ensure your PSP reports the correct gross income amount to the IRS. If you find an issue with your 1099-K, first double-check that you’re comparing the right numbers. PSPs only report gross income, so ensure you’re comparing your gross income records to the 1099-K rather than your adjusted gross income.
Next, review your transaction records to see if the issue is accounted for when you compare the details by the date the money was processed rather than the date you received it. If you still find that there’s an error, contact the PSP that sent you the 1099-K and explain the problem. They can issue you a corrected form. If you still have questions after talking to your payment service provider, you can call the customer service number shown on the 1099-K you received.
Form 1099-K can cause a lot of confusion for e-commerce business owners when tax time comes around. Now that you know what a 1099-K is, who needs one, and how to avoid common mistakes related to it, you can confidently review yours and report your income to the IRS accurately.