How to Use Form 1099-K for Your E-commerce Business

1099 form for E-commerce Business

The IRS Tax Form 1099-K refers to Third Party Network Transactions and Payment Card Transactions. The IRS uses this Form to improve compliance with voluntary taxes. Sellers will generally get Form 1099- K by 31st January if they hit their sales threshold. This Form will calculate the gross sales of the business concerning all the reportable transactions that occur through a paying card terminal or a third-party payment portal such as PayPal. At the end of the year, when the business sales are combined, they will have to report their sales to the IRS through Form 1099- K. Businesses that sell on third-party online websites such as Shopify, Amazon, eBay, etc., will also receive this Form.

How can e-commerce businesses use Form 1099-K?

E-Commerce business websites that have been in business for a long time and have performed a lot of sales from third-party payment transactions will receive 1099-K from their payer. The recent changes in IRS taxing now require the PSEs to issue Form 1099- K to each of the payees to who they have paid $600 or more as gross reportable payments towards settling third-party transactions. Previously online businesses, merchant businesses, and small e-commerce businesses didn’t have to worry about this tax Form, as the payment threshold was $20,000, and they had to report after a transaction volume of 200. But now, even small online businesses that connect with third-party apps will receive 1099-K when their payment threshold reaches $600. There is no consideration of the number of transactions.

The changes in the new reporting system aim to build transparency in online business reporting and mitigate underreporting. Therefore, online businesses and e-commerce startup companies must adapt themselves to the new reporting structure of the IRS. They can follow the following ways to adapt to the new payment regime.

  • Small businesses should preserve all their payment invoices and receipts to back up any claims that are misclassified.
  • They should never mix up personal payments with their business payments,
  • They should update their income received periodically and should maintain a detailed record of all the payments that they have received through third-party apps and entities.
  • They should validate all information pertaining to their payment in Form 1099K in accordance with their actual payments with the business.

Why does an e-Commerce business receive Form 1099-K?

Some third-party payment entities like Paypal would file and issue Form 1099-K to their payees, who are generally merchant businesses that sell goods and services to their customers in the course of their business. Online businesses that sell products and services online will receive this tax Form from their PSE or payment settlement entity like Paypal. They accept payment from the end customers and then settle the amount in the bank account of the business.

Businesses have to wait for their payers to issue them Form 1099-K. They can use the information given in this tax Form to verify the income that they have received. They should also save a copy of this Tax Form for future reference. The payments received from the payer are considered income, and the business is expected to pay taxes for its income.

How should the e-Commerce business use this tax Form?

E-Commerce businesses need not submit Form 1099-K with the IRs with their traditional tax returns. It is only an information return document that informs the business regarding its past year’s transactions. Businesses can use this tax Form to cross-check their income. They can use this information to report their earnings on Schedule C or as part of the gross revenue of the company if it is a corporation or a partnership firm. Businesses are not required to submit their 1099-K Forms to the IRS; they have to pay taxes for the amount reported in their gross sales.

Bottom Line:

If you are a third-party organization and wish to report your e-commerce transaction taxes with the IRS, you would require a digital tax compliance partner like Tax2efile. They will help you navigate your 1099 filing requirements easily, and with the help of their accounting software, they will offer a smooth and hassle-free digital filing process within a few minutes.