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Tax time is here and the tax documents are starting to show up, either in your mailbox or your inbox.
Before you start to freak out about these documents, there are a few key things you are going to need to know about these documents.
Prefer to watch this in video format? Check out my Facebook Live I did on this same topic right here.
Your Business Legal Structure Matters
The most important thing to note here is your business legal structure (sole proprietor, LLC, partnership, S Corporation, C Corporation).
Have no idea which one you are? That is going to be a problem. You need to know, a very crucial part of being a business owner.
Not sure if you are set up with the right one? Talk to an accountant or a lawyer to make sure you are set up for the right one. (Please don’t ask your business coach or a random Facebook group for advice. The advice you get around your legal structure needs to be specific to YOUR business, not what someone else is doing.)
The legal structure also affects how much tax you will pay in your business, and even whether there are deductions that you are allowed to claim or not claim. Again, this is why you need to discuss with an accountant or a lawyer your business legal structure.
Did you get a 1099K or a 1099-MISC/NEC?
Receiving these forms or not receiving them is an important part of what your business legal structure is. S Corporations and C Corporations will not receive 1099-MISC/NEC. But the other business types will. And all business types will receive a 1099K if you met the threshold for receiving them.
It is important to know what your business type is so that when you are filling out forms for affiliate networks and W-9’s for your clients, you list the correct type.
You received a 1099K
If you received a 1099K, this is a form that you need to keep a copy of, but it is not used to file your tax return.
A 1099K is a 3rd party form that comes from a vendor that you received credit card payments into (i.e. how you received money from your clients and customers).
You will want to verify that the total income on this form, before you take out fees (i.e. PayPal, Stripe, Square, etc. fees), matches the total income you have in your bookkeeping work. If what you are reporting in your bookkeeping work is lower than the total on this form, then you must make some adjustments. Reporting a lower income total than what is on the 1099K forms is a very clear indication that you will get audited. (Most audits are not random.)
You will usually get a 1099K from places like PayPal and Square. Your merchant providers who collect digital payments for you and issue them to you.
The threshold for a merchant provider to send a 1099K is you must have 200 transactions AND at least $20,000 in sales.
Also make sure you keep copies of these forms. Even if you keep it electronically, keep it somewhere you can easily find it if you need to in the future. The requirement is a minimum of 3 years, but the recommendation is 7 years.
It’s not fun trying to get copies of these forms later down the road. I have had many of my auditing clients spend months and money trying to get copies of these forms. So just save it now.
You received a 1099-MISC/NEC
You will not receive this form if your business structure is an S Corporation or C Corporation and it’s noted correctly to the vendors you work with. But if you are a sole proprietor, LLC or partnership, you should be receiving these forms.
There are a lot of online business owners who do not send 1099-MISC/NEC because they simply do not know. Check here to see if you should be sending 1099-MISC/NEC for your business. But if you meet the thresholds to send 1099-MISC/NEC, then you are required to send them. It is an IRS requirement.
You will receive a 1099-MISC/NEC from people and businesses who paid you more than $600 in the calendar year. These people and businesses should ask you to fill out a W-9 before they issue you a 1099-MISC/NEC.
What if the information overlaps between the 1099K and 1099-MISC/NEC?
This is perfectly okay and is most likely going to happen!
You just need to notice what the top of each form says. Is it a 1099K or 1099-MISC/NEC?
As I mentioned above, the 1099-MISC/NEC is used to complete your tax forms. The 1099K is just a third party form informing multiple different government bodies how much you received in digital payments.
I have received a few questions about how to report income that is showing up on 2 different forms without double reporting it.
The first thing to notice is what the type of form is. If you have a 1099K and a 1099-MISC/NEC reporting the same income, you have no issues here. Only the 1099-MISC/NEC will be used to file your business tax return.
If you have 2 1099-MISC/NECs that report the same income or 2 1099Ks that report the same income, then you have a problem. But this rarely ever happens.
Verify the Information is Correct
When you receive these forms, it is very important that you go into your bookkeeping and check to make sure the information is correct. Also make sure your identifying information is correct.
If something is incorrect, contact the person or company that sent the form to you and ask that it be amended with the correct information.
In the case of an audit, auditors MUST take the 3rd party forms as correct, NOT your word. So if the forms are incorrect, it is your job to get them amended with the correct information.
I audited a company a few years ago. Their 1099K had one month double reported on it. But my manager and supervisor made me use the 1099K amount, not the owner’s word. So make sure you get them amended when there are errors.
1099Ks are usually prepared by a computer. 1099-MISC/NEC are usually prepared by a human. Errors happen. Just make sure to check that it’s correct based on the data you have.
Report the Total Income
Yes there are fees taken out of the total amount of money you receive. Those fees are an expense, or deduction from your total income on your profit and loss statement.
When the government bodies compare the 3rd party forms like 1099K and 1099-MISC/NEC and the total amount of income you reported as gross sales on your tax return is lower than these totals, you are setting yourself up for an audit.
Always report the total and take the fees out as an expense.
Pay Attention to Your Tax Forms
Many people ignore their business finances until the very last minute, and then they either forget important parts of it or end up paying a lot more for help than they would have had they kept up with their finances all year round.
When you receive the forms in the mail or your inbox, save them somewhere you will easily be able to find them. Then verify the information that is on these forms is correct.
As a business owner, it’s your responsibility to make sure you are following the right tax laws for your business. And being informed of those tax laws is the first step.
Make sure you get assistance from someone who actually understands your business if there are still things you don’t understand after you work to get informed. The tax laws are not always easy to understand and make sure that you are complying with all of them.
Want to make sure you are ready for tax time when it shows up on your doorstep? Get my course Painless Tax Prep to be fully prepared in your business. Or send me a message to see how I can help you be fully prepared. Let go of the stress and frustration of tax time by working with me.
Make your tax prep easier this year with Painfree Tax Prep! You'll learn all the important things to prepare your business for taxes this year and be able to easily hand over your records to your tax preparer with little stress.
With Painfree Tax Prep, you get:
- Workshop explaining all the things you need to know to easily prepare for your taxes
- Estimated Tax Payment explanation
- Masterclass on 1099's
- Masterclass on Business Legal Structures
- The Tax Prep Power Pack
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