Guess who’s back?
It’s that special time of year again when you wake up one morning and realize that Amazon has handed over lots of juicy information about your business to the IRS. If you’re grappling with understanding the Amazon 1099-K form for sellers, you’re not alone. This document is critical for online retailers, and it’s essential to know what Amazon is telling the government about your business and why those details matter. In this guide, we’ll walk you through understanding the Amazon 1099-K form for sellers, ensuring you have peace of mind that your books line up with what transpired throughout the year.
The Basics: What is the Amazon 1099-K Form?
The 1099-K is a reporting requirement of third-party payment providers to ensure that online retailers report their sales to the IRS. It’s the responsibility of the third-party payment provider to detail this information to the IRS on behalf of sellers. The IRS will cross-reference this Amazon 1099-K form to the tax return filed for that corresponding tax year, showcasing how much you sold on an annual basis.
Did you know that the 1099-K first came about in 2008 as part of the Housing Assistance Tax Act?
The Details: What is included in the total?
Here’s where things get interesting. Amazon reports the Unadjusted Gross Sales that they processed for each seller to the IRS. So, you might be thinking “Ok, cool, so if I sold $20,000 of product during 2021, then my 1099-K line 1 will show $20,000 right?” Nope. The Unadjusted Gross Sales total includes the following:
Unadjusted Gross Sales (Line 1: 1099-K Form)
- Product Sales
- Shipping Credits (Collected by Seller, then automatically paid back to Amazon)
- Gift Wrap Credits (Collected by Seller, then automatically paid back to Amazon)
- Promo Rebates (Discounts)
- Sales Tax Collected (What?! )*
Basically, for any sale processed during the year via Amazon, the customer’s amount in total for each order is what Amazon will report to the IRS. Even if you later end up refunding 100% of your orders, you’ll still get a 1099-K form for the original order totals. Also, any sales tax collected from your customers (which is later passed on to the state directly) is included in this total as well. Sales tax is not a revenue item; it is simply a pass-through liability.
* FYI: Amazon does not include sales tax collected through the Marketplace Facilitator program in the Unadjusted Gross Sales total. Which at this point is every state except Oregon, Montana, and New Hampsire.
Currently, the IRS does not require the payment processors to adjust or break out any details from the gross amount. So, the fact that Amazon is grouping sales tax in your 1099-K is not some devious plan; instead, it’s just a way for them to cross their t’s and dot their i’s to make sure they are in compliance.
Amazon is gracious enough to offer up a page 2 of their 1099 (which is also sent to the IRS) that breaks down the Unadjusted Gross Sales total details. This critical report can help make sense of the total on line 1. Below is an example of the Amazon 1099-K form. Line 1a is the Unadjusted Gross Sales total. On Page 2, you can see the elements that make up that total, starting with Gross Product Sales.
Amazon’s 1099-K Form: Example
How does the Amazon 1099-K Form compare to my books?
The gross sales total from the financial statements you receive from MuseMinded monthly will look different from the Unadjusted Gross Sales total from your Amazon 1099-K form. The good news is the differences are easy to understand. First off, both Amazon and MuseMinded report revenue for the calendar year based on the Amazon ship date.
However, at MuseMinded, we show Gross Revenue and Order Promotions (discounts) as a separate line item on your P&L. Shipping and Gift Wrap Credits on the other hand, are direct pass-through payments to Amazon, so we offset those collections with the associated expense. These expenses and associated collections will be grouped in the Amazon FBA fees account. We report all Sales Tax activity on the balance sheet to the Sales Tax Liability account. Here’s a cheat sheet to help illustrate the differences:
1099-K to Financial Statement Cheat Sheet
| Activity Type | Location on 1099-K | Location on Financials |
|---|---|---|
| Product Sales | Line 1a | P&L – line Item |
| Shipping Credits | Line 1a | P&L – line Item |
| Gift Wrap Credits | Line 1a | P&L – net of fees |
| Promo Rebates | Line 1a | P&L – net of fees |
| Sales Tax (manual state) | Line 1a | Balance Sheet |
| Sales Tax (marketplace facilitator state) | Not included in 1099-K | Balance Sheet |
This is all great, but what should I do with this information?
We are glad you asked! Here’s the bottom line; your 1099-K is going to look different than the gross sales total that you report on your tax return. However, both your Amazon 1099-K form and your books are accurate. Do not fret! We have only seen two IRS tax notices sent to clients about this since we started the firm. In both of those instances, we were able to help the client communicate with the IRS the reason as to why the numbers appeared different, and in both cases, there were no penalties or fees levied.
That said, if you want to avoid the potential of this situation altogether, you can have a conversation with your tax accountant about this very issue. This can be addressed by simply increasing your revenue and your expenses by the difference between your Gross Revenue on the books and the Unadjusted Gross Revenue from the 1099-K. We are more than happy to help out with this adjustment .
We do not recommend maintaining your books by showing sales tax as additional revenue, especially if you are looking to sell your business or are reporting to any banks for loan compliance.
Take away: Amazon 1099 K Form
The 1099-K is a fundamental document for IRS reporting, and by having solid bookkeeping and good accounting records, discrepancies can be easily settled.
Want to master your eCommerce finances with crystal-clear insight? Schedule a call with our team today!
