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DISCLAIMER: This post is not to be taken as specific tax advice for your particular situation. To get that type of advice, you should seek the advice of a CPA or tax advisor.
A Form 1099-K, Payment Card and Third Party Network Transactions, is completely different informational return than the Form 1099-MISC you receive for most of your income. But before I get into the nuts and bolts of a 1099-K, let’s discuss a general rule about the income you earn from your author business.
The Internal Revenue Service (IRS) expects you to report every dollar of revenue that you receive in the course of doing business on the gross receipts line of your tax return. Whether you receive a 1099 for that income or not, every dollar should be reported, including the $30 of cash you received from the small book signing you participated in at your local library. And that revenue should equal or exceed (usually the case) the amount of income reported to you on all 1099 forms.
I receive questions every year regarding the 1099-K that Apple / iBooks sends, mostly because the 1099-K never matches the amount of money the author received in the form of deposits into his or her bank account.
There are a couple of reasons for this:
First, a 1099-K reports gross payments from the sale of your ebooks before any fees or iBooks’ 30% commission. The amount reported on a 1099-K will not match the deposits that hit your bank account for this reason.
Second, iBooks only reports revenue on a 1099-K for regions where you received more than 200 payments and more than $20,000 of total gross payments for the year. So, while you might have received more than $20,000 of revenue from the United States or the United Kingdom, you might have received less than $20,000 from India or Australia. This makes reconciling your 1099-K to the payments you received in your checking account very difficult.
In theory, authors should be able to reconcile the Form 1099-K they received from Apple with the financial reports that you can access inside iTunes Connect. But this can prove to be time consuming and, in some cases, impossible.
So, what should a frustrated and confused author do in this case?
First, if you truly want to protect yourself and make sure you’re reporting the correct amounts, take this to a CPA or tax advisor.
Second, if you still want to take care of your taxes yourself, simply report the amount of income reported to you on your 1099-K and deduct the difference between what the 1099-K reports and the what you received as deposits in your bank account as an expense. More specifically, you can report “iBooks’ 30% commission and other fees” as an expense on your tax return.
For example (and in round numbers for simplicity sake), let’s say I received $70,000 in my banking account for the sale of ebooks for the year. When I receive my 1099-K, I notice that Apple is claiming that I earned $100,000 in gross payments on the sale of ebooks. I know that iBooks earns 30% commission those sales. So, on my tax return, I report $100,000 on the “gross receipts” line and $30,000 on the expense line as “commissions paid to iBooks,” which nets to the $70,000 I received in my bank account. Because I am a cash basis taxpayer, I know that I have included 100% of the income I earned for the year on my tax return, and my gross receipts match what was reported to the IRS.
The problem with the above example? Your amounts won’t be an exact 70/30 split, and therefore, this method isn’t 100% accurate. There are also such concerns as the amount of Value Added Tax (VAT) that iBooks deducted from our book sales and remitted to the proper tax authority. This is why reconciling your 1099-K to your iTunes Connect reports is the most accurate way of handling this (or hiring someone to do this for you).
I know! Taxes and accounting can be ridiculously complicated. This is one of those cases where I encourage you to keep good records and make notes on how you handle the reporting of your income. If the IRS questions what you reported on your tax return, make sure you can show them exactly how you came up with your numbers. When the IRS claims you didn’t report the amount of income from your 1099-K, this doesn’t necessarily mean that your tax return is understated. It could just mean that you reported the net amount (what you received in your checking) instead of the gross amount reported to you on Form 1099-K.
Okay… What questions can I answer?
There is a lot of misinformation out there about 1099s. I’m going to explain a few of these rules that authors need to know in hopes that I can save you from the wrath of the IRS.
DISCLAIMER: This post is meant to be helpful and not to be used as tax advice for your specific tax situation. Please consult with a tax advisor for more individual information related to your specific situation.
What is an IRS Form 1099?
A 1099 is what the Internal Revenue Service (IRS) called an Information Return. 1099s are a series of forms used for various purposes and reporting of income. For purposes of today’s post, we are going to discuss the 1099-MISC, a form used to report earnings to a self-employed individual (as in not an employee of the company). Also, for purposes of today’s post, we are discussing our need to send 1099s to people we have paid and not the 1099s we are receiving with our own earnings.
Services Greater Than $600
In general, you are required to send a 1099-MISC to independent contractors or others (not employees of the company) you paid more than $600 for services rendered for the tax year. And you must send these 1099s by January 31.
Exception: If these services were paid to an incorporated entity, you are not required to send that person or company a 1099.
For example, I originally sent my editor a 1099 for the editing services he provided. In the next year, he had incorporated. I no longer had to send him a 1099.
If you paid an attorney for services rendered in the course of doing business, you are required to send a 1099 regardless of what type of entity they are. If they’re incorporated, you’re still required to send them a 1099.
Services paid with a credit card or through payment companies such as PayPal
You are not required to send a 1099-MISC to freelancers or other unincorporated businesses such as LLCs if you paid them via a credit card or through PayPal.
In this case, the payment companies such as PayPal are required under certain circumstances to send a different version of a 1099. The payment company will handle all required reporting, and you are not required to send a 1099-MISC.
Should Authors Send a 1099-MISC Anyway?
While you are not required to send a 1099 to anyone you paid through Paypal or with a credit card, you will not hurt anything by sending one.
The general consensus among accountants is to send the 1099s anyway to people paid through payment companies.
Why? The IRS penalizes taxpayers heavily for not sending 1099s, but there is no penalty for sending a 1099 form that was not required (as long as the 1099 is correct).
And, no, this does not result in the double reporting of income for the payees.
What types of services should authors be concerned about?
In my experience, authors should be looking for any amount they paid for covers designers, editing services, attorney fees, accounting fees, author assistants, custom photography work, repair work on computers, and formatting fees, just to name a few. Once you’ve identified the people and businesses you’ve paid, then you run them through the exceptions and questions above.
A few words of caution…
The penalties for not filing 1099s are steep, and the IRS frowns heavily on people who don’t file these information returns. Penalties vary anywhere from $30 to $100 per form depending on how long past the deadline the forms are filed. If the IRS decides that a company intentionally disregarded the requirement to file a correct 1099, the company may be penalized a minimum of $250 per form.
Also, if you don’t file 1099s, the IRS can come in and disallow the deductions you took for that expense. Unfortunately, I’ve seen this happen.
What questions do you have? I’m happy to answer them in the comments.