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Selling Online? Meet the 1099-K Tax Form

So what does this change for small businesses?

Aldrich: For businesses that have $20,000 in revenue and 200 transactions or more during tax year 2011 [at a given processor], they have to take this form that just shows gross revenue processed by PayPal or Amazon or their credit card processing company and compare it to what they will report on their taxes. That is now the burden that the small-business owner has to deal with when they are getting their taxes together for 2011.

The small-business owner is going to get this 1099 form. It's going to have a gross revenue number on it as well as a month-by-month breakdown of what the processor transacted on behalf of the small business, [but they will have to] go from this gross revenue to what the IRS needs, which is the net income number. Small businesses will need to subtract out returns, fees, exchanges and mistakes. It's going to require that the small business take the gross revenue number and separate out all of the expenses and fees they shouldn't be paying taxes on.

How many small business owners will this actually affect?

Aldrich: There are 21 million small businesses that are solo entrepreneurs in the U.S., of the 28 million in total. The average [annual] revenue of that solo entrepreneur is roughly $40,000. It's possible that it could be millions of businesses that get tripped up by this.

But the way the law reads -- it's $20,000 and 200 transactions with a specific third-party network, because if I am selling on eBay and PayPal is processing and selling on Amazon and I've got a retail store where JPMorgan Chase (JPM - Get Report) is processing -- those three folks can't talk to each other. Each one of these firms is looking at it individually. Interestingly, that's probably not quite how the IRS meant the rule to be interpreted, but there is no other way to deal with it right now.

What else should small businesses know about the new form?

Aldrich: It raises the importance of having a good understanding of all of their expenses attached for the year and any fees they had to process with these transactions. It's really important that the small businesses have all of those fees and expenses in a format ... that they can accurately report their taxes and reconcile back to this gross 1099-k amount.

The important thing for business owners when you get this form is "don't panic." It's a number that's somewhere in your business if you have good record-keeping. If you're already tracking your revenue and expenses in an accurate way you're in good shape. If you're not, now would be a good time to start, as opposed to April 14.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to:

To follow Laurie Kulikowski on Twitter, go to:!/LKulikowski


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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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