IRS Form 1099-K is used to report income from merchant card and third party network payments. Generally, this income is reported by storefront owners who have to notify the IRS of their credit card sales each year. However, recent changes to the tax code may cause more common taxpayers to be affected by the reporting requirement. How can taxpayers recognise and avoid potential traps that could cause them to pay higher taxes this year due to Form 1099-K?
Form 1099-K changes
The main change involves the IRS requirement that merchant card and third party network payments be reported on Form 1099-K rather than Form 1099-MISC. However, making the simple form change will not affect taxpayers? bottom line. What will affect them, though, is the inclusion of online sales by individual taxpayers in the reporting requirement for Form 1099-K. Under this rule, individuals who sell personal goods online, through auction websites such as eBay or those who sell their personal items through third-party payment networks like PayPal, could possibly be required to report their income and pay income tax on it.
Fortunately for taxpayers, the IRS only requires that those who receive $20,000 in credit card or third-party sales report them on 1099-K forms. However, even if individual taxpayers do not earn enough to use Form 1099-K, they may still have to report their income, depending on the type of sale performed and whether they were continually engaging in this work during the year.
Potential snares for taxpayers
As mentioned previously, many taxpayers who are involved in making casual sales will not have to use Form 1099-K, since it only applies to those who accrue at least 200 payment transactions, totalling $20,000 or more, per year. However, those that regularly make a habit of selling on eBay, Amazon.com, or PayPal, for example, may fall under the scope of these new regulations and be forced to report their income as taxable. This could particularly affect those that have Amazon.com or eBay ?stores?, or vendor pages. In the case of these habitual sellers, the third-party firm or the credit card company will issue 1099-K forms to both the taxpayer and to the IRS, reporting the total amount of sales that year.
Essentially, these rules were designed to catch taxpayers who had not been reporting income from these sources correctly. Even without the new form, this type of income has long been considered taxable and should have been reported in previous years. By introducing these new regulations, the IRS is basically closing a loophole that some have been able to use successfully in the past.
To avoid being caught in the Form 1099-K trap, taxpayers who do not intend to perform regular online sales should scale back their involvement in selling goods or services.
However, those who plan to make their online reselling into a regular business should begin setting aside funds for estimated payments to cover any outstanding tax they may have to pay at the end of the year. If taxpayers perform sales under several different online accounts, they should keep a running total of their sales across all the accounts. This will help them avoid being surprised if they exceed the $20,000 limit and receive a 1099-K at the end of the financial year.
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