If you are earning money from a side job, a small business, or by selling items online, it is important to report your gross income correctly. If you make more than $600 in a year through payment apps or online marketplaces, you could receive a Form 1099-K. This form is typically sent to you and the IRS by January 31st the following year.
Taxable and Nontaxable
Keep in mind that all income, regardless of the amount, is subject to tax unless the tax law specifically exempts it. This is applicable even if you don’t receive a Form 1099-K. You will need to report as income, the profit you make from your activities. The Form 1099-K shows the total amount of payments you received (gross income). You can use this form, along with other records, to calculate the actual taxes you owe on your profits.
What Should You Not Report on Form 1099-K
You should not report money received from friends or family as a gift on Form 1099-K. Similarly, reimbursements for personal expenses should also not be reported on this form. This includes shared costs for things like car rides or meals, money received for birthday or holiday gifts, or repayments for household bills from a roommate. These are not taxable income. It’s important to mark these payments as non-business in payment apps whenever possible.
Personal Items Sold
If you’ve received payments for personal items you’ve sold through a payment app or online marketplace, you might receive a Form 1099-K. Personal items can be anything you used personally, like a car, fridge, furniture, stereo, jewelry, or silverware.
The way you report these payments on your tax return depends on whether you made a profit or a loss from the sale. If you sold various personal items and some were at a loss and others at a gain, you should report them separately. You can see how to report the gain or losses from personal items sold here.
Avoid IRS Notices
You should total the amounts on all the 1099-k forms you received and check that the total gross income you report on your tax return is not less than your total 1099-K forms for that respective tax year, otherwise you are going to receive an IRS notice. There are two possible issues that could cause your gross income to be less than the total on your 1099-K forms:
- one or more 1099-K forms might be incorrect , in which case you should request a corrected form from the issuer,
- there are errors in your accounting of gross income, in which case you should review your bank reconciliations, you should make sure you do not report net amounts instead of gross amounts, check that you account for outstanding deposits and that you considered all the bank accounts in which you received payments.
Recordkeeping
Maintaining accurate records is important for tax filing. Remember to document all expenses, sales, and payments received for services throughout the year. You must separate business and personal transactions to be able to calculate your potential tax liabilities.
You can found more information about the Form 1099-K on the IRS website.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.