It’s that time of the year. When the clock rolls over into a new year, and we collectively exchange an old pile of days for fresh, new ones, ready to take on our resolutions and self-prescribed challenges, something else happens.
Yearly IRS tax season starts. For Amazon sellers, that means receiving a 1099-K from the mothership and for new Amazon sellers, potentially wondering what it even means and why it’s important.
Even if you’ve been selling for a while, it’s entirely possible you’ve never seen this form generate and make an appearance in your Seller Central Tax Document Library.
When that new line appears, if you’ve never seen it before, it’s not unreasonable to be confused. The IRS has enough forms already, after all.
In reality, it’s not as intense as it may seem, especially if you’re opening it for the first time and see potentially massive numbers written down. For sellers who sold six figures-worth of goods last year may be blown away by seeing a six-digit number on a tax form, then promptly terrified by their wandering mind conjuring tales and nightmares of tax bills deeper than the Pacific Ocean.
Let’s take some time and break down exactly what a 1099-K is and how it relates to your tax responsibilities as an Amazon seller.
[related link=”https://sellerjournal.com/selling-on-amazon-in-2020/”]2020 is going to be a massive year for Amazon sellers. Check out my bold predictions for the marketplace this year and how they could affect you.[/related]
What is a 1099-K?
At its core, a 1099-K is not unlike other, more common 1099 forms like the 1099-INT (interest). An IRS 1099 form is an information form designed to simply inform the IRS of earned income outside of salaries, wages and tips. 1099-K specifically handles income received from third-party payment processors.
As an Amazon seller, you’ve agreed that Amazon the company will take care of collecting payment information for your customers. This idea is a large part of the alure of selling on the Amazon marketplace for some, and remains a big perk, regardless of constantly changing rules and fee increases. They’re still your customers–not Amazon’s–when they buy your goods either through FBA or merchant-fulfilled. Amazon is simply the middle-man in this scenario.
The 1099-K form details the total amount in dollars the processor (Amazon) has received on your behalf and transferred to you, the seller. This number is not the amount of money Amazon has transferred to your bank account. This is a very important nuance and something I’ll cover in the next section.
The IRS requires businesses or individuals to report roughly how they got all their income, and the 1099-K falls into that bucket next to 1099-MISC (contracting, services rendered, etc.), 1099-R (retirement disbursements), 1099-G (government payments like unemployment wages), and others.
Why The Amount on Your 1099-K is Less Than What Amazon Transferred to Your Bank Account
The most important thing to keep in mind is that the 1099-K number is all money, before considering FBA fees, referral fees, storage fees, PPC, inbound shipping, etc. The list is practically a mile long these days, but the good news is this: if Amazon was your only source of income as a business or individual, the 1099-K box 1a is essentially your gross sales for the year before refunds.
In theory, you could take the number, subtract all the Amazon fees, COGS, refunds, and any other costs associated with selling your products on Amazon and come up with a net profit for the year.
If Amazon wasn’t your only source of income, though, the math gets a little bit harder but not so much so that a good accountant that specializes in e-commerce can’t handle.
The 1099-K Fields, Described
There are a lot of numbers on a 1099-K form, so let’s quickly go over what they all mean.
Box 1a: the total amount of dollars Amazon collected from your customers for the year.
Box 1b: the amount of those dollars where the payment card was not present (for Amazon sellers, this number will always be the same; online retail typically falls under “card not present” because you didn’t actually give the retailer your card to make the purchase like you would at a Home Depot when buying a screwdriver).
Box 2: This box will be empty for Amazon sellers. The Merchant Category Code is defined in cases where a retailer or service provider offers specific services and in their agreement with their payment processor (Stripe, PayPal, Braintree, etc.), they define what kind of business they do. “general online retail of mixed category goods” isn’t a code. But if you’re super curious, Citi Bank has a whole list of MCC codes if you need something to help you sleep at night.
Box 3: the number of transactions. This is the number of times a card was charged. Given how Amazon sometimes splits charges based on delivery windows, one customer order might have two transactions. Unless a customer buys more than one item from you in the same order that doesn’t get processed at the same time, this will be roughly the same as your sales count.
Box 4: Income tax withheld. This field will always be zero unless you, the taxpayer, are subject to backup withholding. If you don’t know whether you are, then you’re not.
Box 5a-5l: the value of Box 1a, broken down by month.
Box 6, 7, 8: if your state has any particular tax requirements for 1099-K income, you’ll see values here.
Why Does Amazon Generate a 1099-K for Sellers?
As a payment processor, Amazon is required to disclose when they handle more than $20,000 in money or 200 in quantity of sales for an individual or business taxpayer. This is a requirement set forth by the IRS.
Simple as that.
How do I File My 1099-K With My Taxes?
The good news is, if you’re doing your taxes right, there’s not much you have to do. I don’t want to get too far into the weeds here as The Seller Journal isn’t a tax blog or accounting resource–and it’s always best to consult a tax professional or accountant for matters like this–but the general idea is that any amount reported on a 1099-K just needs to be accounted for somewhere.
If you’re filing a Schedule C for your business dealings as a Sole Proprietor or Single-Member LLC and your Amazon business is the only income reported on the Schedule C, then you’re already practically squared away.
Tax software will only typically ask for a 1099-K if you don’t already have some other means in which to report the income (like the Schedule C I mentioned above).
When I started doing my taxes, having the 1099-K was super helpful in reconciling numbers; it can prove to be a useful 2nd source of truth. No one wants an audit.
The key takeaway here is that if you received a 1099-K, the IRS will, too, so it’s in your best interest to declare it on your tax return.
Amazon Seller Tax Resources
Since The Seller Journal isn’t a tax blog or accounting resource, I’ve put together a quick list of some of my favorite tax resources you should consider using in 2020.
- TaxCloud – Filing sales tax returns every month can be a pain in the butt. TaxCloud makes it super easy and the best part is that they do most of the returns for FREE.
- EcomTax – Keep track of your sales tax liability and also keep more money in your pocket each month. EcomTax breaks down your liability by state and tells you exactly how much you need to pay and when.
- Not Your Dad’s CPA – One of my favorite e-commerce accountants on the market, today. Mark Tew a.k.a. Not Your Dad’s CPA knows exactly what it means to do business on Amazon and knows exactly how to take care of your accounting needs from that perspective. Bonus: his Reseller Tax Academy will make you the most knowledgable you can possibly be and better equipped to handle your tax and accounting requirements for 2020.