In case your business is using an electronic payment system, you might get a Form 1099-K come tax time. Receiving this form from a business point of view may create some doubts regarding the way that such transactions are reported by the payment processor.
A brief overview of the Form 1099-K may help you to clear your doubts.
What Is Form 1099-K?
Form 1099-K is a tax document intended for the reporting of payment transactions using credit cards, debit cards, electronic funds transfers, payment app processors, and other payment processing platforms.
Payment processors and settlement organizations will have to furnish a 1099-K form to certain businesses and also report the same information to the Internal Revenue Service.
The form is important for ensuring that payments made via electronic means are correctly reported.
Why the Numbers May Look Higher Than Expected
A very common surprise encountered by business owners is the fact that the total that is reported in a Form 1099-K tends to be more than the total received from the bank account.
This is because a Form 1099-K will normally report the gross payment volume. Gross payment volume usually represents the total of the transactions, minus any other costs that could have been incurred during the processing of such transactions.
Understanding Common Differences
Several factors that lead to disparities in payment amounts and the actual deposit include processing fees which decrease the amount of money deposited in your account. Also, refunds and charge backs may not increase your profits while at the same time increasing the total amount of payments listed in the report. Tips from customers, sales taxes collected on behalf of governmental agencies, and payments made through different systems may also cause the difference between the reported payment and actual deposits.
This is why business owners need to keep up-to-date with their bookkeeping throughout the year.
Keep Good Records Year-Round
Accurate documentation will make filing your taxes significantly easier. You need to compare payment gateway statements, bank deposit amounts, your accounting software, and POS data.
Monthly reviews of reports might allow you to notice inconsistencies and not stress out during tax season.
Collaborating with an experienced accountant or financial advisor might also be useful in ensuring your income is reported correctly and deductions taken into account.
Preparation Leads to Fewer Surprises
The 1099-K form is intended to document payments made, but it does not give the full financial picture of your business. Knowing what is included on this form versus what you’ve actually deposited will prevent you from making errors.
Keeping up with your finances all year long will help make tax season easier for you and allow you to concentrate on other aspects of your business.
