What online merchants need to know about the new 1099-K

What online merchants need to know about the new 1099-K

A new tax form, the 1099-K, is making its debut for Tax Year 2011 and will affect many merchants who do business online. Here's a primer on who will be affected and what they need to know about this new piece of paperwork.

What is the 1099-K tax form?
The Housing Assistance Tax Act of 2008 was signed into law as part of a housing and economic stimulus package. Hidden within the recesses of the legislation was a new tax requirement that banks and payment processors (like PayPal) report online sellers' incomes to the IRS.

That means that those who sell products on sites like Etsy and eBay can expect to receive 1099-K forms from whatever entity processes their payments. If you have a merchant account through your bank, you'll get a 1099-K from your bank. If you use PayPal to process the money you earn selling toddler tutus and hair bows on Etsy, PayPal will send you one. The same situation applies to bloggers and freelance writers for online publishers if they accept payments through PayPal or another third-party payment processor.

The 1099-K is meant for those who earn income, in a fairly regular stream, from payment sources that don't qualify as standard jobs  -- regular jobs issue taxpayers W-2 forms. That means it will most affect independent contractors, work-from-home personnel and online sellers. Previously, some parties may have used the 1099-MISC form as the best available alternative.

Why did the IRS introduce the 1099-K?
Times have changed, and the 1099-K was specifically designed to accommodate the large volume of workers earning their incomes and livelihoods via the Internet. The purpose of the form is to help reduce under-reporting -- because the IRS is keenly aware that there are millions of dollars earned through online transactions in today's marketplace that are going largely under-reported, if not unreported.

The form won't affect those who occasionally sell the junk taking up space in their basements. Instead, it's intended to make sure that money made by top sellers with decent-sized businesses is reported and taxed. It's also intended to capture situations in which a 1099-MISC may not be issued to a prospective taxpayer because income didn't result from a contractual arrangement (which is often the case in online sales).

Who should expect to get a 1099-K?
As with most tax forms, there are thresholds or triggers with the 1099-K. Not everyone who earns money online will receive one. For taxpayers to be issued a 1099-K, they must meet these thresholds, according to the IRS's published guidelines:

• The individual must have participated in at least 200 reportable payment transactions over the year.
• These transactions must total at least $20,000.

Be sure to review the IRS guidelines for exemptions and special circumstances.

How will 1099-K impact online merchants?
The debut of 1099-K means that taxpayers who have established credit card merchant accounts, PayPal accounts, Amazon accounts or any similar type of account and who meet taxing criteria (the thresholds described above) will be issued 1099-Ks by their service providers at the end of the calendar year. The form will set forth what the taxpayer has earned from online sales.

There are some anticipated problems with this form and its mechanics. One is that the form won't report adjustments for fees or charge-backs. In other words, if a merchant issues a refund to a consumer, the original earnings still might show up on the 1099-K, meaning merchants could get taxed on money they never technically earned.

As with all tax forms, the 1099-K means additional paperwork for those who receive it. And it will mean additional legwork --and processing costs -- for payment processors as well. Some experts, therefore, are worried that processors will pass these costs onto merchants in the form of extra fees.

See related: IRS targets merchants processing offshore cards

Published: February 14,2023