1099-K Form & Small Business Tax Reporting

November 15, 2010

Small businesses that that accept credit card payments will be getting a new tax form next year, the 1099–K. There are many different 1099 forms, all of which are used to report income to the IRS.  You’re probably used to getting at least one 1099–INT form every year from your bank to report interest income.

Until this year, small businesses that used merchant accounts and third party payment services, like PayPal, had no official reporting of the income they received from those sources.  Many eBay sellers and other online entrepreneurs have been accepting thousands of dollars in payments every year and they IRS believes that not all of those transactions are being reported as income.

Without 1099s issued by buyers, there is no real accountability for sellers. According to the tax laws they should be reporting their own income, yet some may not be. Enter the new 1099-K form, which takes effect for the 2011 tax year (so it doesn’t take effect for this tax season, which deals with the 2010 tax year).

What is the 1099-K Form?
If you are a seller or business owner you won’t have to do anything really different — other than report your income if you haven’t been. The 1099-K form is something that banks, or third party payment processors, fill out. If you receive at least $20,000 in total payments and engage in at least 200 transactions during a calendar year, the credit card issuer or the payment processor will have to provide a 1099-K to the government. That way, the government can then compare it to what you are actually reporting.

Casual sellers aren’t as much of a concern to the IRS. If you clean out your attic and make a few hundred dollars on eBay, you probably won’t be caught if you don’t report that income (unless there is an audit). However, the IRS figures that there are plenty of serious Internet based businesses paying less than they owe in taxes because payment processors aren’t reporting information on what businesses are making. The 200 transactions/ $20,000 in payments received threshold was chosen because once you are doing that kind of volume, you are probably not just selling things casually.

Will the New 1099-K Form Affect You?
For people like me, this probably won’t change much about the way I do things. Yes, my entire business is conducted pretty much online through PayPal. And yes, I more than meet the threshold. However, I have also been reporting my entire income on my income taxes. I even print out monthly PayPal statements to keep with my tax documents. This would actually make things easier for me; if PayPal sent me a copy of my 1099-K, as well as sending one to the government, I wouldn’t need to print anything out.

For those who have been under-reporting their income, though, this could mean changes. If you don’t fully report your income, you might find that you are audited in 2012 for the 2011 tax year if the 1099-K from a credit card issuer or payment processor indicates that you make more than you say you do.

It is important to understand that the paperwork burden is on the payment processors and card issuers, and not on the businesses or individual sellers. Yes, it is a blow to your financial privacy. But, according to the law, you should be reporting that income and paying taxes on it anyway. The 1099-K is basically a way for the IRS to more effectively track down the people that aren’t doing what they are supposed to. If you’re already properly reporting your income, you shouldn’t have anything to worry about.


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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8 Responses to 1099-K Form & Small Business Tax Reporting

  • Richard Stooker


    Thanks for this heads up. I hadn’t heard that the government was forcing Pay Pal to start reporting like this.

    I do wonder about the 200 transactions, though. Many online business transactions are not receipt of income – they’re payment of expenses or just plain buying stuff. So does that count as a transaction?

    Will Pay Pal report all my deposits (even if their total is below $20,000) just because I use them to buy 201 Internet marketing ebooks?

    And it makes me glad I don’t have a credit card merchant account. I don’t want to have to issue 1099-Ks to everybody I paid. That will be a burden on many small businesses.

  • Larisa

    Uncle Sam is doing everything possible to figure out how much money business owners are making. I think the point is to catch all those internet sellers, but a lot of other businesses are going to be caught as well. This is the first step to the IRS getting a handle on the internet. They have been trying for years without success. But now, I think they’ve got all you online sellers. Make sure you see a tax professional to get all the legal deductions possible so your taxes will be as low as possible.


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