The New Form 1099s are Coming Your Way | USTaxAid

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The New Form 1099s are Coming Your Way

Written by Diane Kennedy, CPA on November 28, 2022

We have been talking about this new reporting for several years. It is finally time. The new Form 1099-K reporting rules are here.

If you sold products or services for over $600 in the year and used PayPal, Venmo, Amazon, Square or other third-party networks, you are going to get a Form 1099-K. You may even get more than one for the same sale.

Things are about to get interesting.

The IRS is excited because they feel that only 45% of people who make sales report the income. That means they will expect twice as many taxpayers to report sales on their tax returns.

The reporting is supposed to exclude friends and family payments, such as what you can select with PayPal. I am not taking any bets on that rolling out easily, though. We will see.

What Do You Do If You Receive a Form 1099-K?

You need to report the gross sales that you made. If you have a business, you get to also take deductions against that income. If you do not have a business and are running your side income like a hobby, no deductions are allowed.

Deductions for Hobby Businesses are Not Allowed

Ten years ago, the IRS started matching Form 1099-Ks with income. They have refined the process and are ready to ask you why you didn’t report your Form 1099-K.  This will especially be a problem for all the taxpayers who get a Form 1099-K for the first time, thanks to the much lower threshold for reporting.

Your Sales Numbers May Not Match the Form 1099-Ks

Your sales may not exactly match what you receive on the total of the Form 1099-Ks.

For example, if you are a consistent seller, month after month, through FBA (fulfilled by Amazon) you are likely to see that the numbers don’t match at all to what you received. In the case of FBA, the 1099-K will report the gross sales without considering fees, discounts, or returns.  That means the amount showing for sales is not going to match what gets deposited in your bank account as the sales amount. Plus, there is usually a timing different. The sale may happen on Amazon’s books, but it takes a while for it to show up in your bank account. That is what a timing difference means. Each party will have a different date for when a sale occurred.

If you are cash basis tax payer, you only report on what gets deposited. So, the amount you report will generally lag Amazon by a few days or weeks.

How do you handle a difference like that? In the case of timing differences or discrepancies like this, make a reconciliation of what is reported with what you received. You may want to attach it to your return, but that is not required. Just be prepared with the calculations in case you are asked.

The biggest mistake is not reporting anything. If you receive a Form 1099-K showing a sale and you made no sales, report the amount on Schedule C as a gross sale and then show the same amount as a miscellaneous deduction. That will bring the total to zero. Attach a statement that explains why they show an amount paid to you and why it is not accurate.

 

For example, let us say Aunt Sally gave you $1,000 as a graduation gift. She sent the money using PayPal. But it was not income. It was a gift. Hopefully, she used the friends and family option so you do not get a Form 1099-K and hopefully PayPal can tell the difference when it’s time to send out  the 1099s.

We’ll see. In this case, if you get a Form 1099-K showing a gift like that, report it and then explain in an offsetting deduction how it was not really income.

 

Do This Now for Tax Panning

There are several things you should do before year end if you are going to get a Form 1099-K. (And even if you are not)

#1: Start your business. The worst thing possible is to have this income be considered a hobby. In that case, it is all taxable with no deductions.

#2: Get your accounting caught up. You will need to know the actual amount you received. Do not rely on Form 1099s to report your income. They often are wrong and your records will be needed to prove that.

Got a tax question? The best way to get an answer plus get cutting edge real-life step-by-step tax strategies is by joining Wednesday Coaching.

 

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