bookkeeping tax

What is a 1099-K tax form?

Around the end of January, some handmade sellers will receive a form in the post called the 1099-K. In this post, we explain what this form is about, what you'll need to do with it and what to do if you don't receive one.

Around the end of January, some online sellers will receive a form in the post called the 1099-K. In this post, we explain what this form is about, what you’ll need to do with it and what to do if you don’t receive one.

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The 1099-K form

Form 1099-K (otherwise known as “Payment Card and Third Party Network Transactions”) is a tax document sent out annually by card payment processors to sellers using their services. This form is for the payment processor to report to the IRS how much money was processed through their services and by whom. This empowers Internal Revenue to keep better tabs on the amounts taxpayers are actually earning and is an attempt to minimise the “tax gap”.

The “tax gap” is a term commonly used to describe amounts of unreported income not claimed as taxable income by businesses: cross checking in this way means that the IRS can know if a business is underclaiming their revenue.

What’s a payment processor?

A payment processor is any company who takes and processes a payment from a customer on your behalf. You’ll receive a 1099-K from Etsy if you use their Direct Checkout for your shop (and meet the minimum threshold requirements, see below for details). PayPal and Stripe are other examples of payment processors, as is any bank that provides merchant card services.

Who receives a 1099-K?

A 1099-K will usually be only sent to you if you make $20,000 or more in the taxable year, in 200 or more transactions using the same processor.Both conditions have to apply so if you have 500 transactions with a total of $10,000 you won’t receive one; neither will you if you make $40,000 with 199 transactions.

Your credit card merchant account provider is however required to file a form 1099-K for your business regardless of the volume or amount of transactions you process. You’ll usually receive 1099 forms in the mail from the end of January - exact timings depend on the schedule of your provider.

Tip: For Etsy sellers, you can see the totals that will appear on your 1099K over on your Etsy Taxpayer ID page.

I didn’t get a 1099-K, does this mean I don’t have to file taxes this year?

If you don’t receive a 1099K form, this does not mean that you will not have to file a tax return - all businesses engaging in selling activity for profit are required to lodge annually no matter how much they make.

What do I do with the 1099-K form once I receive it?

The form itself isn’t hugely useful from a sellers perspective as it’s sent to you mainly to cover the tax requirements of the payment processor, however you’ll need to compile them together and give them to your tax preparer to include with your Schedule C filing.

It’s also wise to review the numbers to ensure that they are correct in case the payment processor has made an error in calculating your totals. In this case, you’ll be wanting to contact the processor for an explanation of the total and to request a reissue of the form if it is found to be incorrect.

My 1099-K doesn’t match my revenue totals!

Keep in mind when using the form to compare to your tracked revenue on Craftybase that your total revenue will not directly match the one reported on your 1099-K. This is because the “Gross sales” calculation on the 1099 usually includes a bit more than your actual order revenue: card processing fees and canceled orders are some of the amounts that will be included in the final reported tally that will not be part of your actual revenue total.

Please note that tax laws change frequently. This information is for educational and informational purposes only should not be construed as tax or legal advice. Please consult a licensed financial expert in your area with specific questions or concerns.

Nicole Pascoe Nicole Pascoe - Profile

Written by Nicole Pascoe

Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.