New IRS 1099-K Tax Form

The 1099-K is a new form for tax year 2011 that shows gross sales reported to the IRS.  The IRS has introduced a 1099-K form requiring all Payment Settlement Entities (Credit Card providers including banks, PayPal, and others) to report all qualifying payments made to individuals during the 2011 calendar year. This includes payments by credit cards, debit cards, and stored-value cards (including gift cards).

To prevent duplicate reporting to the IRS, the 1099-MISC form from the small business owner must now exclude the payments types listed above; however, it must still include Cash, Check, EFT, ACH, and Direct Deposit payments.

Online sellers who have $20,000 or more in gross sales and 200 transactions or more in the calendar year will receive the 1099-K from their third-party payment networks such as PayPal. Sellers will need to check the information on the form to ensure the reported income is correct.

Sellers will also be responsible for documenting expenses that were associated with that reported income, so that they only pay taxes on the profit, not the gross sales as reported on the 1099-K form. That's important because the gross sales totals do not exclude expenses like transaction fees or returns, which are important deductions to a small businesses' net income.