Today’s digital landscape creates opportunities for would-be business owners to spread their wings. Many people have discovered the satisfaction that comes with owning their own business. Working from home (or anywhere else) is nice, too. As long as you have an idea, a laptop, and an online retail presence on Etsy, eBay, Amazon, or any other digital marketplace, you’re ready to roll.
While many online business owners start their operations with the purpose of bringing in extra money — setting it aside for that new boat, the kids’ college funds, or a dream vacation — others sell items for fun or as a hobby. Either way, it’s considered a business, and there’s enough money coming in to justify the time spent.
Treacherous Waters Ahead
The reality is that many of these e-commerce neophytes go into business with little to no knowledge of tax accounting, revenue reporting, or the scope of legal and financial responsibility that comes with running a business, especially one run solely online. And that can lead to trouble. The IRS will eventually come knocking, looking for its share of the wealth.
One aspect that often catches online sellers off guard is the 1099-K form. This document has a significant impact on how online businesses manage their finances and taxes. Here’s what every online business owner needs to know about 1099-K forms and their impact on the business.
Form 1099-K Refresher
The 1099-K form is a tax document used to report electronic payments received to the IRS. These payments include debit and credit card payments, automatic bank withdrawals, and payments received through third-party entities such as PayPal, Stripe, Venmo, or other merchant payment processors. These payment platforms are responsible for sending Form 1099-K to businesses if they meet specific criteria, including a certain threshold of payment volume.
Avoid an Unpleasant Surprise
Online sellers who’ve been in business for several years and have revenue of more than $20,000 are probably familiar with Form 1099-K. It’s been in use for several years, although it’s taken a while for business owners and third-party payment platforms to fully embrace it and understand how to follow the rules around revenue reporting via Form 1099-K. Newbies in the e-commerce world — those who are selling items for fun or as a hobby — may not be as familiar with it, which means they may be in for a surprise when they file their 2023 taxes.
Form 1099-K was implemented as part of the American Rescue Plan in 2011. Tax laws changed in 2021, and the threshold for receiving Form 1099-K was lowered to $600 from the previous $20,000 or 200 items. That difference drastically impacts smaller sellers, who will now have to report their online earnings as taxable revenue.
Tracking and Reporting
Form 1099-K isn’t one that’s filled out and submitted to the IRS. Rather, it’s sent to online business owners by the payment processor to notify them of the revenue they’ve received electronically through the payment platform. It’s a double-check to ensure that the company’s internal records reflect the same amount. The online revenue is then reported on Schedule C when taxes are prepared and filed.
If in Doubt, Get Help
If you have an online business on Etsy, Amazon, eBay, or another digital shopping platform, it’s wise to seek the guidance of a trusted CPA or tax preparer. A certified tax professional will help keep you out of trouble, providing valuable insights and ensuring that your business is compliant with all IRS regulations, including those around online revenue..
At Adams Accounting Solutions, we deal with this kind of issue every day. We’re experts in small business tax accounting, and we’re here for our clients when they need help, answers, or someone to hold their hand. Call today to schedule a consultation. We’ll help you figure out what to do with Form 1099-K — and all your other tax forms too!
