1099-K: Clearing up the Confusion

If you’re a startup company who receives payments for your goods and services through credit card merchant accounts or third-party processors, then you’ve likely received one or more Form 1099-K’s. And if you’re like many recipients, you may have given them a quick once-over, filed them away, and not thought much about them since. The simple fact is that ignoring a 1099-K can end up costing you a lot of money in the form of an unexpected tax bill. What’s worse is that it’s a bill you probably shouldn’t be paying at all. So, unless you’re running a startup with plenty of cash to burn, we recommend that you familiarize yourself with 1099-K’s: what they are, why they’re important, and what you can do to avoid paying the unnecessary taxes they can bring with them.

 

What is a form 1099-K? 

A 1099-K is simply a tax form, like a W-2, that reports the recipient’s earnings. In the case of the 1099-K, it’s the gross amount the recipient was paid through the credit card company or third-party processor. The form’s purpose is to ensure that taxpayers are accurately reporting and paying the full amount of taxes they owe to the IRS on their sales.

 

Who receives a 1099-K?

Anyone who uses an online-based service to collect payments. Examples include:

• Sellers of apps on Google Play and Apple’s App Store.
• Uber and Lyft drivers.
• Amazon and Ebay retailers.
• Attorneys, doctors, architects and any other professionals who accept and receive credit card merchant or online payments for their services.
• Freelancers (writers, graphic artists, bookkeepers, etc.) who are paid through PayPal, Etsy or other third-party payment services.

 

The frequent problem:

As mentioned above, 1099-K’s report the gross amount earned by the recipient – that is, the full amount earned before any commissions or fees are taken out – not the net amount, which is what the recipient is typically paid by the credit card company or third-party processor.

Herein lies the problem: The IRS requires your company to report the gross amount earned on its tax return, not the net amount the company was actually paid. Many startups, however, mistakenly report the net amount (this is the amount that downloads from your bank into your accounting system or a spreadsheet) instead of the gross amount. When the IRS receives the return, it compares the total income figure stated on the return to the total amount of the gross payments reported on the 1099-K’s. When the figure on the tax return is, inevitably, smaller than the total amount reported on the 1099-K’s, the IRS presumes you’ve understated your income and – you guessed it – your company owes more in taxes.

 

The solution:

Here’s what you can do to help prevent a 1099-K tax problem for your business:

• Be sure to report the correct amount of total income on your corporate tax return – which is the total combined gross payment figures reported on all of your company’s 1099-K’s.
• Then, report all commissions and processor fees as expenses on the return. The result is an accurate net income figure upon which your company will pay the proper tax amount.
• Check the figures listed on your 1099-K’s and compare them to those in your accounting system. There’s always the possibility that a mistake has been made.

 

One last thing:

If your company uses Stripe, Paypal, or another third-party payment service, make sure to open the account with the company’s EIN, not your SSN. This is a frequent occurrence and creates tons of problems when the IRS sends the owner a 1099-K instead of the company.  

---