Wednesday, July 4, 2012

The Amazon 1099-K Is Not a Big Deal

The Amazon 1099-K you might be getting in the mail in a few months doesn't mean anything important for your business. This is an oversimplification, but it's worth putting it in extreme terms because some people have gotten confused and spread misinformation about what the 1099-K even is, implying that it will increase taxes for small businesses or somehow reflects a new form of self employment taxes. It won't, it hasn't, it isn't, it doesn't. The form is just a way for the IRS to track online payments and make sure it gets its legal cut of business income.

The IRS and federal government created this form as part of its effort to make it more difficult for people who sell and receive payment online to hide their income. Anyone who makes more than $20,000 from one online payment processor and does so with more than 200 transactions with the processor will be the subject of a 1099-K. Amazon will send information on the total value of all transactions received by that person to the IRS, and it will send a copy of the Amazon 1099-K to the person in question, to inform them of the amount of income it reported to the IRS. The same is true for Paypal and a number of other online and credit card payment gateways. In other words, the 1099-K just allows eCommerce companies to report online income.

You were probably already reporting all that money as business income and paying taxes on it anyway, so the 1099-K won't change very much for you or your business. Of course, it will cause confusion for some people who don't understand the difference between income and revenue. Businesses only owe taxes on their profits, meaning revenue after subtracting costs. But the 1099-K reports the total income from all transactions, even those that were later cancelled for a refund, including the portion of the payment that covered postage and shipping.

So in a sense the 1099-K does impose an accounting burden on your business. You need to track online payments received separately from any other payments you might accept. You similarly need to track returns and shipping costs from those payments in that separate category. When you file tax returns, you get to claim all acceptable business expenses and deduct those from income to find your taxable revenue. With the 1099-K you have to deduct things like returns and shipping costs from your online revenue separately to figure out how much you own in taxes on that income. This will cost some companies, but it's nothing as bad as the "new taxes" that some writers are worried about.

The Amazon 1099-K is a clear attempt to close a tax hole that many small online businesses were able to exploit to underreport income. Assuming you weren't doing that, it just requires a few minor changes to how you track income and expenses so that you can continue to maximize deductions, but the impact will be very small.

The Amazon 1099-K Has Some People Scared. But Some Basic Preparation Is All You Need to Handle It Easily with Minimal Impact. Learn More at

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