Congratulations! You just started selling your products on your favorite online marketplace. The customers and profits are rolling in, but there’s just one more hurdle to overcome: taxes.
If you feel like you can’t wrap your head around how to file and manage your taxes as an entrepreneur, you’re not alone. Plenty of freelancers who sell their products through online marketplaces are unaware of the tax implications of their business, and few know about the 1099-K tax form before they create their online shop. Here’s everything you need to understand about the form so you can get back to doing what you do best — creating and selling.
What Is a 1099-K Form?
When you work for an employer, you receive a W-2 to prepare for filing taxes based on your gross income. A 1099-K form is similar, but you’ll only receive it if you accept payments from card transactions — including debit, credit or gift cards — or if you collect payments through third-party payment networks, like Etsy, PayPal or Amazon.
Most indys who use a third-party payment platform will only get this form if the total card payments they receive exceed $20,000 and they’ve made more than 200 such transactions. But if you’re a seller in Massachusetts or Vermont, you’ll receive the form if you have just $600 or more in sales through Etsy Payments in a given year.
Who Gets One?
Any individual or business that accepts payments processed through a card transaction or a third-party payment service will receive a 1099-K form if they meet the minimum requirements outlined above. Here’s just a small sample of the types of indys who may get one this year:
- Sellers on Etsy, eBay and Amazon
- Crafters who process card payments but sell through their own website or at boutiques
- Landlords who accept rent payments through a third-party payment processing platform
- Other types of freelancers who invoice for their services via third-party platforms
When Will You Receive It?
You should receive your form containing the previous year’s reporting from companies that process your card payments by January 31. If you don’t receive a form, but your records show that you’ve met the minimum requirements to receive one, try contacting the payment company you use. Just keep in mind: Whether or not you receive this form, you’re still required to report all of the income you’ve made through your solopreneur business.
How Do You File?
The turnaround time to file is tight. The IRS expects you to report your earnings by the end of February if you’re filing by mail — and by the end of March if you’re filing digitally. To file, you’ll need to enter the amount recorded on your 1099-K as revenue on your Schedule C. It’s also important to file your business expenses as deductions on your Schedule C. Here, be sure to consider your materials and listing fees so your tax liability accurately reflects your income.
It’s essential to keep your personal payments separate from your business payments, so that means you can’t use the same platform for both. For example, if you receive a monetary gift for your birthday through PayPal that’s categorized as “Goods and Services,” it’ll show up on your tax form if your overall transactions have met the minimum requirements — even though gifts don’t need to be reported.
Do You Need to File Multiple Forms?
If you receive multiple forms, you’ll have to determine if you need to file all of them. For example, if you only have one Etsy shop and you receive separate forms from Etsy and PayPal reporting on the same revenue stream, you should file the form with the highest amount of gross income. For multiple forms that report more than one source of income — if, for you example, you sell on both eBay and Etsy and earned two separate streams of income — you’ll need to report both forms on your Schedule C. Luckily, many tax software programs give you the option to add multiple forms, and you can use an app to automate your tax savings so you’re always ready to file.
Starting an online business is an exciting endeavor — so don’t let the fear of a new tax form hold you back. By understanding the above requirements and expectations, you’ll be well on your way to mastering the 1099-K when it comes time to file.