1099K – What To Do With It

Credit card companieS!

Photo by Eliazar Parra Cardenas on flickr.com

Did you get a 1099K form in the mail? Are you wondering what to do with it? I was a little confused when I saw the first one because I was told they weren’t going to be happening. Oops. Somebody didn’t get the memo.

Anyway, if you’ve gotten a 1099K – that’s the form from your credit card company that says how much money was charged on credit cards to your business – you’re probably wondering how to report it. If you’ve been looking for information, you may have noticed that there’s conflicting information out there. It’s because there isn’t a definitive “this is what you’ve got to do” answer from the IRS. So here’s how I will be doing it on my returns; I think it makes sense and will be good with the IRS.

You’ll note that the line that says 1099K income doesn’t work when you try to input it into your software. That’s because the IRS won’t be using that line. Your computer’s not broken, the software isn’t broken. The change came sometime in August and the new line was already put into the forms. The IRS decided that since the line was coming back for 2012, they’d leave it there but just blank it out for now. You’re not crazy, it’s the way it was set up.

Even though you don’t get to use that line, you still want to report that income. This is how I say you should do it:

Make a worksheet for your income line. Show the 1099K income reported as one number. Show your other income reported as another. The total should read as the total income for your business.

Here’s an example: let’s say you took in $50,000 in revenue for 2011. You know your total revenue figure. You receive a 1099K that says you were paid $20,000 with credit cards. On your income worksheet you list:

  • Credit card income reported on 1099K – $20,000
  • Other revenue not on 1099K – $30,000

Easy enough, right? That’s my recommendation. In fairness, the CPA down the hall says to just ignore the 1099K and report the $50,000 straight. Here’s why I disagree. I do audit work for a living. If this comes back to bite you in the butt, you’re going to be glad you listed the 1099K as a separate line item. It’s not that the CPA dude is wrong, it’s just a covering your behind kind of thing.

If your credit card company is sending you an IRS reporting form, it’s highly likely that they’re sending that same form to the IRS. If the IRS pulls your return up for audit, don’t you think they’re going to ask about the $20,000 on the 1099K? If you’ve already listed it separately, well, that’s an audit letter they might not need to send.

Here’s some other issues you may have with the 1099K:

  1. The credit card company reports the full amount of the charge, not the amount less fees withheld. For example: lets say you charge your customer $300. The credit card company withholds their fees and only sends you $292.50. You’ll have to think about how you’ve been reporting that. Lots of businesses record their revenues as the actual income that comes into the bank – charge less the fees. Your 1099K will report the income as $300–you’ll need to make sure that you expense those fees out.
  2. Same issue with sales tax. Many retailers just record sales and keep the tax separate. Your 1099K will give the whole dollar amount charged – you’ll need to remember to back out your sales tax.
  3. Restaurant owners, beauty salons, anyplace that accepts tips: if a customer charged a tip, you’re going to have to back out the tips paid to your workers. The entire charge is being reported on the 1099K.

Are you starting to see how this could be a bit difficult? Don’t forget places that give “cash back” to customers, that’s going to be another expense you’ll have to remember.

Bottom line – there will be a lot of forgiveness this year in the reporting of your 1099K income. People are going to be confused and the IRS is fully aware of it. But if you’re already getting 1099K statements, you’ll want to do your best to report it correctly now. It’s so much easier to do it right the first time than to be “forgiven” for doing it wrong.