Tis the season where tax forms are flying freely and online merchants are organizing all their documents for filing. If you’re a U.S. merchants, one form you definitely want to pay attention to is the humble Form 1099-K.
This post explains what the 1099-K is, what to do with it, and what on earth a tax form has to do with shipping.
What is Form 1099-K?
Form 1099-K’s full name is “Payment Card and Third Party Network Transactions.” Third party payment processors – like PayPal, Stripe or Square – are required to send this form to online merchants who use their services and meet both of these criteria:
- The merchant made over $20,000 in gross proceeds through that payment processor
- The merchant made more than 200 individual transactions with that payment processor
These same payment processors are also required to send a copy of this form straight to the IRS. Forms are due to merchants by January 31 of each year, and due to the IRS by March 31.
Why Do We Get Form 1099-K?
Back when eCommerce was newer, U.S. lawmakers suspected that some online sellers weren’t being 100% truthful about how much money they were actually bringing in via internet sales. So, they began requiring payment processors to report sellers of any significant size directly to the IRS.
This is not unprecedented, and is similar to the way employers are required to report their employees’ wages to the IRS with form W-2.
What is Included on Form 1099-K?
Form 1099-K will include your gross proceeds through a particular payment provider. What it will not include is a breakdown of your tax deductible business expenses. This includes things like:
- The amount actually spent on shipping costs
- Fees you paid to the payment processor
- Subsequent refunds and returns
Because of this, there will always be a discrepancy between what the payment processor tells the IRS you made, and the net profit you actually made.
Long story short – sure, you may make $10,000 in income on a big sale. But perhaps you spent $500 on advertising, $500 on freight, and $2,000 on the parts and materials for the product.
At first glance, it may look like you made a cool $10,000; but with your expenses you actually made less. And as long as you keep track of your business expenses, you can avoid paying taxes on the entire $10,000 in income you made.
This is where it becomes vital to keep track of all of your business’s expenses, including things like shipping charges, payment processing fees, and returns.
If you don’t keep track of business expenses, then the IRS thinks you owe a big fat check on all $10,000 of the smackeroos on your form 1099-K.
For Example….
Say you processed $100,000 in sales through Stripe last year selling custom made pet bobbleheads on BobbleYourPet.com. Yes, those cute little chotchkies you see on office desks and car dashboards. Fun right?
Well, despite it looking like you made bank in the first year of sales, $10,000 was collected to cover the cost of shipping from the $100,000 in sales you accrued. So instead of pocketing the whole $100,000, you paid your carrier of choice (say UPS) $10,000 of that total.
According to your 1099-K from, your bobblehead business will owe income tax on $100,000. However, since you spent $10,000 to cover the costs of shipping, that $10,000 given to UPS can be deducted as a business expense. That’s a big win. You know why?
By just going off of your 1099-K, IRS would expect a big fat tax check for the taxes on that $100,000. But when you show on your taxes that you actually turned around and spent $10,000 on shipping – a tax deductible expense – the IRS will be satisfied. And therefore, you will owe slightly less in taxes.
That’s worth a big smile to any merchant just starting off. Now to get back to shipping out that tiny Chihuahua bobblehead for Nancy in the Florida Keys…
What Should Online Merchants Do with Form 1099-K?
We know filing your taxes can get pretty complex, so check with your tax professional before making any official decisions.
The good news is that form 1099-K is an informational form. That means it’s mainly for your records and you don’t have to do anything with it – like send it to the IRS with your tax return.
Still, we suggest double checking it against your bookkeeping records. Even though they’re basically robots, payment processors can and do make mistakes.
Want to know more about form 1099-K? Check out the IRS website or contact an accounting professional familiar with eCommerce.
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