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Are You Ready for the New 1099-K?

by Miranda Marquit

Starting this year, for tax year 2011, there is a new 1099 form in town. Many of us are already familiar with the 1099-MISC, especially if we work from home as contractors. The 1099 is meant for income that comes, in a fairly regular way, from sources that aren’t considered a “regular” job (which will issue you a W-2). There are different types of 1099 forms, including those that report interest income and dividend income. The latest type of 1099, though, is the 1099-K.

What is the 1099-K?

Tax form 1099k

Will you receive a 1099-k?

Due to the rise of of people making money with the help of the Internet, the 1099-K has been introduced. For the most part, the 1099-K is meant to ensure that income made from power sellers on sites like eBay is properly reported. The 1099-K is issued by third party payment processors, including banks and non-bank services like PayPal. So, if you use eBay to earn money selling, your transactions, processed through PayPal, will be reflected on the 1099-K issued by PayPal. If you sell through Amazon, and Amazon processes the transactions, you will be issued a 1099-K from Amazon.

This even applies to bank accounts. Banks that processes your transactions through a merchant account or some other way will issue you a 1099-K, stating your income such transactions. This is meant to cut down on some of the under-reporting that the IRS saw regarding certain transactions where a 1099-MISC might not be issued because the situation might not be a contract situation.

In order to be issued a 1099-K, though, you will have to have participated in at least 200 transactions amounting to at least $20,000 over the course of the year. So, the occasional eBay seller trying to clean out the attic is not likely to be issued a 1099-K. The new form is meant to enforce income reporting among those who are doing decent business, and who may not be reporting it.

Issues with 1099-K Reporting

I’m already seeing some problems in my own situation with the new 1099-K forms. Since most of my clients pay via PayPal, I fully expect that I will soon receive a 1099-K from PayPal. Of course, many of my clients also issue me a 1099-MISC. I’ve already received a few of those. The problem with this is that some of my income is going to be double reported to the IRS, making it look like I earned more than I actually did.

In order to protect myself in the event of an audit, I am going to have to make a note of which clients issuing 1099-MISC forms also pay through PayPal so that information can be cross-referenced later. (My accountant will also need this information, since he’s preparing my taxes.) Additionally, it will be important to go through my PayPal statements and tote up the fees paid each month. These can be deducted against my income, providing me with a little help. While I’ve always kept good records in the past, and reported all of my income, the new 1099-K will require me to be even more vigilant in my efforts.

If you have a business that involves selling products or services, and a third-party is handling the transactions, watch for the 1099-K. And make sure you reconcile your 1099-K forms with your 1099-MISC forms.


Published or updated January 22, 2012.
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{ 11 comments… read them below or add one }

1 Peter

Thanks for the reminder, I didn’t even think about the double reporting of income problem – it’s something I’m going to need to consider as well. *sigh. Taxes.

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2 Ryan

I didn’t think about the double reporting either. This may not affect me, but it could affect some of the people I do business with. Unfortunately, I am required by the IRS to send them a 1099-MISC if I paid them over $600 over the course of the year, and PayPal is then required to send them a 1099-K. I feel like I am contributing to the confusion, even though I am required to report the money I paid to contractors.

Update: If you made purchases or payments through PayPal, credit cards, or similar payment processing centers, then you may not have to issue the 1099 after all, as these will be taken care of by the payment processor.

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3 Miranda

Sadly, I think it’s one of those unintended things. They hoped to catch more eBay sellers, but failed to think of those of us who use PayPal for ease of payment for contract work.

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4 Juan

Hey thanks for the info. I had not heard anything about this, I guess I need to start working on my taxes early :P

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5 Bill

We are working with a client that is going to act as a broker for transactions. PayPal is telling us that they won’t be issuing 1099K forms for transactions that are NOT ebay. Will have to see how this really plays out.

we were informed we would have to issue our own 1099 forms.

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6 Doug Nelson

According to the IRS (I called them) you don’t provide a 1099-MISC to those you paid via Paypal. Intuit even sent out an email to QuickBooks customers with instructions that said the same thing.

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7 Ryan

Doug, thanks for the note. I looked through my e-mail and found a notice from Inuit:

If you have paid 1099 contractors or vendors in the past year using payment forms other than cash or check, you need to be aware that the IRS has issued new reporting regulations for tax year 2011 1099-MISC form. These regulations will exclude payment types such as credit cards, debit cards, and those from third party payment networks, like PayPal, from the 1099-MISC form that will instead be reported on the new third party form 1099-K. Here is more info: Changes to IRS Reporting Requirements for 1099-Misc Tax Year 2011.

Here is the IRS page for Third Party Reporting Information Center, which covers additional info.

So it looks like small business owners and other buyers shouldn’t report payments made via PayPal, credit cards, etc, as they will be handled by the payment processor. Hopefully enough people get the word so they avoid the double reporting!

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8 Miranda

I just got an email from one of my clients saying that they weren’t issuing me a 1099-MISC because of the 1099-K. However, as has been pointed out, some have already issued me a 1099-MISC, and I think that the double reporting of income is going to be an issue for some people. Thanks for all the notes and updates.

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9 Chris

Miranda,

As a Licensed Enrolled Agent, I take issue with just a couple things in this article. One: the 1099-K may be issued this year, but the income will not be separated on the Sch C as it will be in 2012. The 1099-K may look a little cumbersome, as all new forms do, but the IRS is giving you a year to acclimate to the changes. You’ll notice on your Sch C this year that Line 1A is for 1099-K payments, but also includes the note that for 2011, you enter -0-. Only in 2012 will you be required to separate payments made through third party processors.

If your clients are trying to send you a 1099-K, they are doing it wrong. Only the Third Party Payment Processors are subject to the filing. If your client is not someone like Paypal or Heartland, then they do not issue you a 1099-K.

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10 Miranda

Thanks for the clarification about the 1099-K. However, no one is saying that clients are issuing 1099-Ks. Rather, clients are issuing 1099-MISC forms, a copy of which goes to the IRS and is reported as income. At the same time, a third-party payment processor might issue a 1099-K. The income might overlap, resulting in double reporting, making it look, to the IRS as if a contractor has made more than he or she actually did. Unless, as one commenter pointed out, PayPal actually only issues 1099-Ks for eBay transactions.

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11 Steven

Good catch. One has to be careful about double reporting.

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