People from around the country emailed me with questions about the IRS Form 1099-K, and “1099-K” is the single most popular search term for my site to date. I’m told that it’s difficult to figure out “where to put Form 1099-K” in some of the retail tax software programs used by DIY’ers. So
as the tax deadline nears, I’ll attempt to clarify a few things.
1) What is a Form 1099-K?
It’s a new information reporting form which you will receive if during 2011 one or both of the following situations applied to you:
1) you received any payments from merchant card transactions (such as Visa or MasterCard), or
2) you received payments from third party payment networks (like PayPal) above the minimum reporting thresholds, which are gross payments that exceed $20,000 AND comprise more than 200 transactions.
2) Where do I report Form 1099-K income?
If you’re self-employed, notice on line 1a in Part I of Schedule C that it says, “Merchant card and third party payments: For 2011, enter zero.” This line has been removed for 2012. Now all gross receipts go on line 1 of Part I.
If you’re not self-employed and you receive these payments as a result of a hobby or other side activity, then they’re reported on line 21 of Form 1040.
If your software doesn’t make these instructions clear and you don’t want to hire a tax pro, then it usually helps to simply look at the appropriate tax form itself and read its instructions. (Honestly, I can’t believe people don’t do this.)
3) Can I just ignore the form since I can’t figure out where to put it in my tax software?
Sure, just like you can ignore your wife’s birthday, mowing the lawn, or the stop sign at a nearby intersection. /end sarcasm/
4) But it’s a hobby! I sell crocheted baby dresses on Ebay “on the side.”
If only we could all be so lucky as to get paid for our hobbies! If I could earn money from riding my bike or playing World of Warcraft, I wouldn’t complain. I’d be thrilled!
Whatever the activity may seem to you, if you received payments from other people, those payments constitute income.
Technically speaking and with very few exceptions, all income is taxable. This includes income from hobbies, gambling winnings, and jury duty pay, among many other obscure and sometimes surprising things. See page 21 of this document for a little list. (I’m feeling redundant here, but the forms and instructions easily found on the IRS web site regularly prove helpful and informative — if a bit obtuse in their language.)
5) OK, so I don’t have to do anything special in 2011. What about 2012?
You can cross that bridge when you get to it. (Plus the IRS is still working out some known kinks with the Form 1099-K.)
Meanwhile, it has been and always will be a great idea to keep track of all your income and expenses. Use a spreadsheet! Hire a bookkeeper! Use free accounting software! If you’re making a decent amount of money “on the side,” you probably want to consult with a CPA about starting a bona fide business (which brings with it assorted tax deductions). But go ahead and start keeping track of all your income and expenses
Because my Disclaimer is on a separate page and I don’t really expect you to click this link, I’ll say it right here:
The information and advice contained within this blog is for informational purposes only, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the U.S. Internal Revenue Code. (Because if you use it for that purpose, black helicopters will swoop down and get your pet kitty.)
Subscribers, users, and online readers are advised not to act upon this information without seeking the services of a professional tax accountant.