What small online businesses and e-commerce startups need to know about Form 1099-K.
If you’ve been in the e-commerce sphere long enough, you already know everything you need to know about Form 1099-K.
But if you’re a new e-commerce startup or an online business that’s still testing the waters, you might want to know about the IRS information return, Form 1099-K.
The IRS has made certain changes to Form 1099-K, which drastically change the way your business reports its income received from online sales, especially through third-party payment apps like Venmo and PayPal.
So, if you’re an active payee for a third-party payment settlement organization, then do expect to receive a Form 1099-K from your payers.
There are many aspects to Form 1099-K and its tax implications on the payee, i.e., the recipient of the 1099-K payments.
Let’s look at a few key points that impact Form 1099-K reporting for online businesses and small e-commerce businesses in the following discussion.
What Is Form 1099-K?
Form 1099-K is an IRS information return in the 1099 series. 1099-K specifically deals with third-party network and payment card transactions made in the course of business in a calendar year.
Previously, the IRS required third-party payment settlement organizations and apps like PayPal to report with Form 1099-K only if the gross total of reportable payments exceeds $20,000 AND if the total number of transactions exceeds 200.
However, that reporting requirement has been reformed with the introduction and enactment of the American Rescue Plan Act (ARPA) of 2021, which focuses on streamlining the 1099-K reporting.
Currently, the IRS requires TPSOs to report and file Form 1099-K if the gross total of reportable payments exceeds $600 with no limitations on the number of transactions.
Form 1099-K Changes: What Are They?
For calendar years prior to 2021, the IRS requires (Third-party Payment Settlement Organizations) TPSOs to report with Form 1099-K only if the gross total of reportable payments is beyond $20,000 and the number of transactions exceeds 200. This is the old regime, but it’s only valid for calendar years before 2021.
But now, small online businesses that are connected to third-party payment apps like Venmo, Zelle, Amazon pay, Google Pay, PayPal, and more will receive a Form 1099-K from the respective payers as soon as the gross payment threshold meets $600 (regardless of the number of transactions).
This is the new reporting regime.
Why Is Your Online Business Receiving A Form 1099-K?
The third-party payment settlement organizations or apps like PayPal are required to file and issue Form 1099-K to their payees. These payees are usually merchant and sub-merchant businesses like yours that provide a variety of goods and services to customers in the course of business.
If you’re an online business that sells, say, skincare products, then expect to receive a Form 1099-K from your payment settlement entity (PSE). These payers accept payments from your customers on your behalf and settle the amount into your bank account, making them your payers.
So, if you’re selling products on app-based aggregators like Etsy, expect a Form 1099-K from your payer.
What Do You (A Payee) Need To Do With Form 1099-K?
All you have to do is wait for your 1099-K form to be issued by your payer. If they don’t, follow up with the payer to send you a Form 1099-K.
Use the information provided in the 1099-K report to cross-verify the income actually received. If everything seems to be accurate, you can just save the copy of Form 1099-K for informational purposes.
However, the payments received by you from your payer will be considered as “income” and you will be required to pay a tax on the said income.
How Do Form 1099-K Changes Impact eCommerce Businesses?
If you have been in business long enough with massive sales from third-party payment transactions, then you must be already used to receiving Form 1099-K from your payer. eCommerce giants like Amazon have been receiving 1099-K forms for a long time now.
However, the changes to Form 1099-K reporting now require the PSEs to issue a Form 1099-K to each payee to whom they’ve paid at least $600 or more as a gross total of reportable payments in settlement of third-party transactions. This includes small businesses.
Previously merchant businesses, online businesses, self-employed professionals, and small e-commerce businesses didn’t need to worry about being issued a Form 1099-K because of the payment threshold of $20,000 and the transaction volume reservation of 200.
But now, small online businesses that are connected to third-party payment apps like Venmo, Zelle, Amazon pay, Google Pay, PayPal and more will receive a Form 1099-K from the respective payers as soon as the gross payments threshold meets $600 (regardless of the number of transactions).
The income received through such payments is subject to taxes, which could increase the tax burden on small businesses to some extent.
What e-Commerce Businesses Can Do To Adapt To The 1099-K Changes?
Form 1099-K changes were introduced in 2021, but effective from the 2022 tax year. The new reporting structure aims to improve reporting transparency and reduce underreporting of income.
So, if you’re an online business or an e-commerce startup, here’s what you can do to adapt to the new 1099-K reporting regime.
- Keep a separate, yet detailed record of all payments received via third-party entities and apps.
- Always update your income as received via TPSOs.
- Validate the ‘payments issued’ information on Form 1099-K in accordance with the actual payments received by your business.
- Do not mix up personal payments with business payments. Personal payments do not constitute Form 1099-K reporting.
- Always save your payment receipts and invoices to back up any misclassified claims.
Third-Party Payment Settlement Organizations Need A Smarter Approach To Manage Their 1099 Reports
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