By Jason Watson (Google+)
Look out PayPal merchants, and the like. The IRS is on to you, and they’ve solicited help from intermediaries such as PayPal, Google, Yahoo, Amazon, etc. The days of selling a bunch of stuff for essentially cash and pocketing some tax-free money is over. Sorry.
There are two ways to trigger the 1099-K. First, if you perform merchant services through a third party credit card or debit card processing site you should receive a 1099-K.
Second, if you use a payment settlement entity such as PayPal, and you have BOTH gross payments that exceed $200,000 AND more than 200 transactions.
What does this 1099-K mean? In the eyes of the IRS, it is pure income or profit and will be taxed accordingly. When a 1099-K (or any 1099 for that matter) gets generated, a copy is sent to you and a copy is sent to the IRS. Your personal or corporate tax returns must show this 1099-K, and it must match the amounts in the IRS’s database. That’s the bad news.
The bad news continues. To offset this income, you need to report deductions such as cost of goods sold, advertising, transaction fees, etc. This is either going to be reported on your personal tax returns under Schedule C, or on your corporate taxes returns (Forms 1065, 1120 or 1120S).
More bad news. 9 out of 10 times the amounts on your 1099-K from PayPal will be wrong. Not wrong from PayPal’s perspective, but wrong from a business perspective. For example, PayPal’s sales figures will not account for returns or credits, or chargebacks. If you sold some personal items, such a Grandma’s old China, those sales will also be reported to the IRS. Really? Really!
Lastly, if the profit is reported on Schedule C via your personal tax returns, you will pay self-employment taxes plus ordinary income taxes on the profit. This could easily be 25% and possibly more. We have a great article on How to Avoid Self-Employment Tax. Please give it a read.
The good news is- we can help. We are experienced tax preparers and business consultants, and can help you dodge the pitfalls of the 1099-K. We will ensure that you do not pay taxes on returns, credits, chargebacks, personal sales, etc.
WCG (formerly Watson CPA Group) has been preparing personal and corporate (LLCs, C-Corp, S-Corp) tax returns since 1998. We offer a flat fee of $75, $150 or $225 for most personal tax returns which includes state tax return, small businesses and rental properties. Our corporate tax return fees start at $325. We also provides accounting and bookkeeping services, and defense contractor compliance.
WCG (formerly Watson CPA Group) is not just tax preparers- we are tax consultants, and our firm will take you through the cycles of your personal and business lives. We are a resource that is always available throughout the year. Have a question? Need advice? Received a notice from the IRS at 5:30PM on a Friday? You can contact us anytime, day or night.