Many home business owners have to deal with the 1099-K. Did you reconcile your 1099-K information this year?
Ah, tax time. I’m a little slow with my taxes this year, thanks to the fact that we moved last year, and I’ve had a lot going on with my business. But I’m getting there, and I’m just about ready to submit my documentation to my accountant. One of the chores that I need to perform as I collect everything is the 1099-K reconciliation.
Reconcile Your 1099-K
A few years ago, the IRS introduced the 1099-K. This new form is issued by third-party payment processors like banks and PayPal. For many of us with home businesses, it’s the PayPal 1099-K that matters the most. But you might get a 1099-K from other parties, if applicable. You will only be issued a 1099-K if you have made more than $20,000 and had more than 200 transactions.
Years after the introduction of the 1099-K, there is still plenty of confusion about what to do with this tax document, as well as who needs to issue it. At the very least, what you need to know about the 1099-K can be summarized as follows:
- Your income might be double-reported if you receive a PayPal 1099-K or a 1099-K from another source. Some clients who pay you via third-party sources like PayPal might still issue you a 1099-MISC. This means that the same income is being reported twice. Pay attention.
- Even if you aren’t issued a 1099-K or a 1099-MISC (or both) the IRS still expects you to report all of your income.
Part of the confusion that remains over the 1099-K is the fact that different accountants still take different approaches to the paperwork. Some accountants tell clients to just let PayPal handle it; if you don’t meet the income/transaction threshold required for the issuance of a 1099-K, that doesn’t matter. Other accountants recommend that their clients still issue a 1099-MISC, since they have to report the income, and it serves as a record when it comes time to deduct.
What your clients do in terms of issuing you 1099-MISC forms or not isn’t really your concern, except in how it affects the way you report your income, and how you reconcile your 1099-K.
And you should reconcile your 1099-K.
The IRS has decided that it’s not going to?make you?reconcile your 1099-K as part of your tax return. However, that doesn’t mean that you shouldn’t reconcile the information on your own. First of all, as you report your income, you don’t want to end up over-reporting your income. That means that you pay more taxes than you need to, on income you don’t actually have. It’s never a good idea to pay taxes on income that isn’t even yours.
Second, good record keeping is essential for a home business owner. If you reconcile your 1099-K, you will at least have some documentation to show the IRS if you are audited. Stay organized with your documentation, and it won’t be too onerous. My reconciliation method is pretty straightforward. I simply list which 1099-MISC forms are duplicated in my PayPal 1099-K. I just keep a handwritten list, and make a mark on my copies of the 1099-MISC forms that are affected. It’s simple and easy.
Other home business owners I know use an Excel spreadsheet to reconcile their 1099-Ks. My method works for me because at this point only a handful of my clients using PayPal to complete our transactions issue a 1099-MISC. Most of them like the fact that PayPal just takes care of it now. But if you have more than a few 1099-MISC forms to reconcile with your 1099-K, you might need a more involved system.
The important thing is to identify income that is being double-reported, and make sure that all of your ducks are in a row so that when you do submit your tax return, you raise fewer red flags, and so that you are prepared for an audit if one comes your way.