By Amy Feldman
NEW YORK, Sept 25 (Reuters) - Been doing well selling tea cozies on Etsy? Launched a successful Kickstarter campaign for the movie you want to make? Forget about trying to slide that income under the radar of the Internal Revenue Service.
Payment processors, including those for credit cards, debit cards, and third-payment systems such as PayPal, are now required to send out a special IRS 1099 form if you made more than $20,000 and had more than 200 transactions.
If you run a small or side business that takes credit cards or electronic payments, you need to study up on Form 1099-K. Issued for the first time last tax season, it’s still new enough to give folks the jitters. As H&R Block Inc spokeswoman Teresa Clark notes, those who get one “may be confused about what the 1099-K represents.”
Bottom line: If you’ve already been reporting all your business income, the new 1099-K won’t be such a big deal, but if you thought your side business of selling online was below the radar for tax purposes, the 1099-K makes certain it no longer is.
Here’s what you need to know:
Payment processors are required to issue the new 1099-Ks for anyone who does more than 200 transactions and brings in more than $20,000.
If you’re selling the occasional item on eBay, relax about owing a big tax bill. You won’t be close to the limit, and you won’t get one of the forms. But if you have a part-time online business that you thought wouldn’t be noticed - selling jewelry on Etsy, say - and you go above that threshold, expect to get one.
After all, a big point of the 1099-K initiative was to stop such small businesses from falling through the cracks.
Even if you don’t think you’ll make very much money, you still need to know about the rules. You may be asked for your Social Security number or other taxpayer identification number when you sign up for something like an eBay merchant account or start an online crowdfunding campaign. So if you exceed those limits, your information will already be on file.
“It’s not that high of a threshold,” notes Murray Solomon, a partner at accounting firm EisnerAmper.
As with any other 1099 forms you receive, you’ll need to include that income when you file your tax return. Exactly how to do that was a big point of contention last year; after all, most businesses don’t track sales by method of payment and some businesses’ fiscal years don’t align with the calendar.
Your 1099-K might list amounts from Visa or MasterCard, without accounting for any returns or shipping costs, while your company’s accounting software might track total sales and costs for the business. Trying to reconcile the two records was complicated.
That thorny issue was resolved earlier this year when the IRS announced that such reconciliation of accounts would not be needed. So while you must file the form, you don’t need to worry about the numbers matching.
And while that greatly lowers the potential complexity at tax time, you’ll need to keep good records to both accurately report your income and take the write-offs you’re allowed.
That’s the big question, and there’s no good answer - but it could be large. After all, the initiative came out of the federal government’s effort to close the “tax gap” - that is, the difference between taxes owed and actually paid.
The IRS estimated that 54 million forms will be sent out for the last tax year, though it’s anyone’s guess what that might mean in dollar terms.
“There has been a lot of discussion about how this 1099-K has the potential to expose many small business owners who do business online, and who may not have been reporting income,” says Troy Thibodeau, executive vice president at Convey Compliance Systems Inc, which issues 1099s for businesses and financial institutions. “There could potentially be a lot of revenue being reported.”