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?