The Etsy Forums have been alight with talk about something called the “PayPal 1099.” Some sellers expressed confusion about what the form is and why it matters. Others knew what it was, but didn’t know what to do with it. We at Outright thought we’d give you the full scoop so that you can get the answers you need.
PayPal’s 1099-K: What is it?
Beginning in January 2012, companies that process credit and debit card transactions will be sending out a new tax form called the 1099-K. For sellers, that form will come from PayPal. The new form will report the money sellers received through PayPal for all of 2011. This form will only be sent to sellers who processed over $20,000 in goods and services sales and completed 200 transactions.
In a nutshell, the 1099-K from PayPal and other merchant processors, more commonly known as payment processors, will report to the IRS (and to you) how much money you made in 2011. But what the IRS won’t automatically know is how much you spent to keep your business running. This is why it is now more vital than ever for sellers to record every single business expense, from shipping to COGS (Cost of Goods Sold) to PayPal and Etsy fees, in order to minimize your taxes. After all, you only pay taxes on your profits (revenues minus expenses), not your revenues only.
Not sure if you’ll receive a 1099-K?
You can sign up for a free Outright account, connect it to your PayPal account, and you can easily see what your revenues for the year are. If it’s over $20,000 and you have more than 200 transactions, you will receive one. [Ed. note: You can also download all your shop data on Etsy by going to Your Shop > Options > Download Data.]
What to do when you receive it:
The form will arrive in your mailbox (and at the IRS) in early February. Be sure to check that the numbers on your form are accurate. One easy way to do this is to import your data over at Outright to see a quick breakdown of your profit and expenses, which you can then check against your form. You will want to make sure that the amount you report on Schedule C, Line 1d is the same or more than the total amount on your 1099-K form. Don’t worry if you have no idea what Line 1d is —just take note of this recommendation and double check it before filing your taxes. Finally, you will want to make sure you have captured and recorded of all of your expenses. Whether you use Outright, a spreadsheet, or another tracking method, this is a good thing to do anyways, regardless of the form!
And don’t stress! While it’s a new form, it’s really just an extension of the other information you already receive each year. Again, just double check that you’ve properly recorded all the information your business receives and you’re set.