Editor’s Note: Please note that while we have put every effort into providing the most accurate information possible for this post, we are not tax professionals. We, therefore, encourage you to consult a tax professional.
April 17 is coming fast, meaning taxes are due in just a few weeks. We know this can be a stressful time for anyone, especially those running their own business. And for some online sellers, this year will mean dealing with a little form that may have come in the mail: the1099-K form.
This was the first time payment processors like PayPal, Amazon and credit card processors like Authorize.Net sent out these forms, which are meant to close the tax gap, or the difference between what people report on their income taxes and what they should report, says Steven Aldrich, the CEO of Outright.com, a bookkeeping tool for small businesses.
Credit card and payment processors sent these forms out beginning in January to sellers who had $20,000 or more processed through them and made at least 200 online sales. Those who sold on multiple marketplaces during 2011, or used multiple payment processors, will have received multiple 1099-K forms, Aldrich adds.
If you got one of these forms, you’ll want to pay attention to it. You see, payment processors sent out two copies of each form: one to sellers who qualified and one to the IRS. And yes, the agency will compare what sellers report on their income tax with what’s on the form. However, there is no need to panic, Aldrich assures us, even though you’ll likely notice a discrepancy between what you’re reporting and what’s on the 1099-K forms.
You see, the forms reflect the gross dollar amount processed for a seller. They don’t include listing fees, expenses or other deductions that lower sellers’ tax liabilities. The IRS knows this, so while it will compare what is reported to what’s on the forms, no one’s going to be knocking on your door if your number is different from what’s on the form.
“The IRS came out with a statement and said, ‘We won’t expect you to validate that number, we just want a fair number,’” Aldrich notes.
When you’re preparing your taxes, you’ll likely use a Schedule C form, which will be attached to your regular personal tax return form. Aldrich advises that “the important thing is to ensure that Line 1D on this form is the same or more than the sum” of the totals on your 1099-K forms.
As long as you have receipts for your deductions and consult a tax professional, you should be in good shape. As you’re trying to reduce your tax liability, remember that you can use expenses like supplies, boxes, packing peanuts and postage as deductions. You can also write off mileage you may have used to drop off your shipments or pick up inventory, even listing or processing fees you may have incurred during 2011 that were part of your business. Also note marketing expenses you had like Google AdWords, and, of course, what you spend on tax preparation.