Tax season is very busy for all individuals, whether employed, self-employed, or business. Furnishing required documents and filing the tax return is something that takes time and effort.
You can find the information related to tax filing from the official website of the IRS or from numerous blogs written.
Besides, most tax filers rely on their tax professionals to file their tax returns. The more experienced the tax professionals, the more preferred he is.
But with the advent of technology, eCommerce, and IT services, things have been revolutionized –even for taxes.
Shopify has become one of the biggest platforms used by eCommerce businesses. It is also true that eCommerce businesses have become big, generating trillions of dollars in revenues. Therefore, IRS has to issue guidelines for online businesses and tax filing as well as the traditional businesses.
With IRS guidelines on eCommerce tax filing, the self-employed individuals or businesses conducting businesses on online platforms like Shopify have to furnish Form 1099-K.
But how does it work for them? In this article, we will discuss filing your Shopify 1099-K and whether it is different from filing a regular Form 1099-K by self-employed people. So let’s get into it.
What Is Form 1099-K?
Form 1099-K is an IRS form and must show transaction records with third-party payment networks. The third-party payment networks are required to fill the form with accurate information and payment data exceeding the minimum threshold requirement outlined by the IRS.
Any single payment exceeding the minimum threshold or the sum of all payments exceeding thresholds must be recorded in the Form 1099-K.
The filled-out IRS 1099-K form is submitted by the third-party payment platforms and submitted to the IRS.
Form 1099-K was introduced in the 2008 Housing and Economic Recovery Act. It was created in 2012 and was applicable in the tax year 2011.
The purpose was to ensure that all the businesses and individuals reported their income for tax purposes.
The credit card companies and third-party processors like Visa, Mastercard, Paypal, Venmo, Amazon, etc., report all transactions processed for businesses.
Minimum Threshold For Form 1099-K
The retailers, businessmen, and eCommerce businesses (Sinra) accepting electronic payments and online credit card payments from the customers have to receive 1099-K if the following thresholds are met:
- If a business, online store, or retailer has received more than $20,000 through third-party processors, and if the number of transactions processed is more than 200 in tax years prior to 2022, a Form 1099-K is received.
- For tax years prior to 2022, the minimum threshold for third-party payments was $600.
- The minimum threshold for the tax year 2022 has been reduced to $600. It is irrespective of the number of transactions or business scale.
Besides the minimum threshold, it’s important to know that the reported amount represents gross payments made by customers using payment cards or third-party platforms.
Another clarification made in law is that Form 1099-K only curtails the payments made for the purchase of goods and services for reporting.
Form 1099-K For Shopify Stores
Shopify is an all-in-one eCommerce platform that facilitates online retailers and eCommerce businesses to start their online stores.
From listing the goods to payment gateways, everything is managed by Shopify. Most of the renowned brands selling online trust Shopify and their solutions.
Store owners using the Shopify platform for selling goods and services to the customers require the Form 1099-K for tax return purposes. Therefore, it’s called Form 1099-K For Shopify Store.
How To File Your Shopify 1099-K?
The online store owners are not required to file the Shopify form 1099-K. Although, they have to file a tax return to report income for the tax year.
However, they are not required to fill out Form 1099-K and submit it to the IRS. They have to attach the copy of Form 1099-K received from Shopify, but they are not supposed to fill it out by themselves.
Who Is Responsible For Reporting Form 1099-K?
Who will file the form if the tax filers are not responsible for filing Shopify Form 1099-K?
As mentioned earlier, the purpose of Form 1099-K is to get a record of the income of the individual & businesses using third-party payment platforms.
Therefore, the IRS requires the third-party payment platforms and credit/debit card companies to fill the form 1099-K for every business/individual exceeding the minimum threshold as specified by the tax department. The Form 1099-K is identified by the unique TIN number of a business or individual.
As a Shopify store owner, you will have received a copy of Form 1099-K from the Shopify tax department if you’re using the Shopify payments and records exceeding the minimum threshold.
Besides, you should understand that you’re not responsible for the submission of Form 1099-K. You can proceed with your tax returns by relying on Shopify Reports for mentioning the income in tax forms.
How Can You Verify Your Shopify 1099-K Amount?
Though, as a store owner, you do not require Form 1099-K for furnishing your tax return. However, can reconcile the amounts listed on Form 1099-K or verify the accuracy by the following simple steps:
- Go to Settings>Payment Providers> Shopify Payments > Payouts >Transactions in your Shopify Admin portal. You can export the transaction data by date. Also, make sure that you enter the starting date 10 days before the tax year opening and the closing date 10 days after the closing of the tax year, so no transaction misses.
- Open the exported data and sort out transactions using Column H(Available On). Why column H? because it showed the date when the money was actually charged from the customer’s bank to be processed. Therefore, Shopify uses this date for tax purposes. Once you have sorted all the data, delete the transactions available 10 days ahead and before the tax years.
- The next thing is to sort the data based on Column B as it relates to the type of transaction. It can be charged(payment charged to customers), refunds(paid to customers against returns, defects, etc.), Adjustments, chargeback, etc. Since IRS requires you to report 1099-K based on gross receipts, you have to delete any rows containing data other than ‘charge.’
- Now you have all the data related to the gross receipts during the tax year 2021. Now calculate the sum of column I. The sum calculated shows the gross receipts, and the number of rows signifies the number of transactions processed.
How To File Shopify 1099-K and Claim Write-Offs?
You know that you don’t have to file Shopify 1099-K. But how you can claim your write-offs. Well, first of all, it’s important to know what is the purpose of write-offs.
As a sole proprietor, you must fill out Schedule C and calculate profits and losses during the reporting tax year. You start with the gross income reported on Form 1099-K.
Therefore, you will need Form 1099-K to state the gross income. The next step is to deduct your 1099 business expenses and write-offs. Following write-offs are available for your Shopify 1099-K:
- Advertising expenses for campaigns and creatives
- Web hosting and domain payment
- Subscription services such as Shopify, store add-Ons, CRM,
- Phone or computer used for business purposes
- Travel expenses related to businesses
- Shipping expenses
- Product and packaging
How To Report 1099-K On Tax Return?
Now to the question of how to report the form 1099-K in your income tax return. We have already cleared the misconception that you might need form 1099-K to file the tax return. You only need to report the gross income as mentioned on Form 1099-K.
In conclusion, your 1099-K is reported in the tax return for mentioning the gross income. It implies that you can file your tax return without having Form 1099-K. You can find the gross income(receipts) using the method we have discussed above.
We have mentioned everything you need to know for filing your Shopify 1099-K. You must know that the store owner is not required to fill or submit Form 1099-K.
Instead, when you’re using Shopify payments, Shopify is responsible for submitting Form 1099-K to the IRS and must contain your unique TIN number.