Are you getting a PayPal 1099-K? Be prepared. It may mean extra paperwork for you.
I hope you keep detailed records as a home business owner, because if you are issued a PayPal 1099-K, you’ll need them. It’s true that you should have good records regardless, but the 1099-K is likely to cause headaches you didn’t expect.
What is the 1099-K?
For the most part, people are associating the 1099-K with PayPal. However, other third-party payment processors, including the banks that process debit and credit transactions for your home business, might need to issue you a 1099-K. As a third-party payment processor, PayPal is subject to issuing the 1099-K.
The 1099-K is meant to ensure that those that do business online report their income. Third-party payment processors issue this form when you have at least $20,000 in transactions and 200 transactions. The issuer sends a copy to the IRS, and a copy to you, for your records. Just like the 1099-MISC, the IRS gets a copy and you get a copy. So it’s not exactly a PayPal 1099-K, but it is a form that many people are going to receive as a result of carrying on business through PayPal. I will be receiving one — just as I received a 1099-K last year.
Originally, businesses were going to be required to submit a reconciliation if their income didn’t match the amount shown on the 1099-K. However, recognizing the burden that would place on many small and home business owners, that requirement has been done away with. But that doesn’t mean that you’re in the clear.
3 Things You Should Know about the 1099-K
As you prepare your home business taxes for the year, here are 3 things you should know:
- Some of your income might be double-reported: There is a possibility that your income might be double-reported. This is an issue for me. At the same time, PayPal is sending out a 1099-K to the government, reporting the payments I received, my clients — most of whom pay through PayPal — are sending 1099-MISC forms to the IRS. So some of my income is reported twice, and it looks like I made more than I did. As a result, I am keeping careful track of which income is double-reported. Just in case.
- Your chargebacks and fees won’t be reported: The 1099-K only reports your income from the third-party transactions. So, if there is a chargeback on a credit card transaction, or if you have had fees deducted from your PayPal income, that doesn’t show up on your 1099-K. You will need to have records documenting these costs so that if you are audited, you have the proof you need to back up your claim that you paid all of what you owe.
- You should be prepared to reconcile your income with the 1099-K: Even though the requirement to submit a reconciliation to your 1099-K with your tax return has been waived, you should still be prepared. If there is a big enough discrepancy, you might be flagged for a tax audit. If this is the case, you will want all of the records available to you, showing allowances, expenses, and fees, as well as copies of the 1099-MISC forms you have that overlap with the 1099-K form that you have.
Some of my clients aren’t issuing 1099-MISC forms to me, due to the fact that they assume the PayPal 1099-K will take care of it. According to the instructions for the 1099-MISC, you are supposed to leave out payments handled by third-parties. Additionally, Intuit, in its QuickBooks Support, indicates that businesses don’t have to include payments made through PayPal or with credit card, on 1099-MISC reports. (Hat tips for links from Jim at Wallet Hacks and Glen at Free From Broke.) However, there has been a lot of confusion on this point, so, as a contractor, you still might end up with double-reported income if your clients don’t realize the change.