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?
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.