As a freelancer and an adult human being you’re probably accustomed to receiving your share of tax forms in the mail this time of year. There are W-2s and 1099-MISC’s to report income, and other forms to report things like interest earned from investments or bank accounts.

But this year you may find a new form in your mailbox: the 1099-K.  Never fear, this new(ish) form is nothing to worry about. Here’s the scoop:

What is Form 1099-K?

To answer that question we have to begin with a history lesson. Ever since income tax came into being, some U.S. taxpayers have – knowingly or unknowingly – underreported their income and thus didn’t pay all the taxes they owed. This is called a “tax gap” and the government, of course, has always tried to find ways to narrow that gap and collect more income tax revenue. (Often to great lengths. Keep in mind that Al Capone was brought down due to failure to pay his income taxes!)

One easily traceable way to make sure people are paying taxes on all of their business income is to monitor transactions through online payment processors like WePay, PayPal, Amazon payments, credit card processors, etc. So 2008 legislation directed the IRS to find a way to monitor that income, and the 1099-K  “Merchant Card and Third Party Network Payments” form was born.

Starting last year, payments processors like WePay were required to file form 1099-K with the IRS in order to report payments made through the service. If we file a 1099-K for you, we’re also required to send you a copy.

Don’t panic! There’s a catch!

Will I Receive Form 1099-K?

Payment processors are only required to file a form 1099-K for people who meet the following criteria:

• They made over $20,000 through one payment processor
• They made that $20,000 in over 200 transactions

If you made $19,000 through WePay (or Amazon, or StubHub, etc.), you don’t receive the form. Or if you made $50,000 but it was through only 199 transactions with WePay, then you don’t receive the form.

What Do I Do with Form 1099-K?

Once form 1099-K arrives, it’s a good idea to check the amount on the form against your own income records. When doing this, keep in mind that the 1099-K doesn’t take into account things like returns, chargebacks or shipping expenses. If you collected money from a buyer to pay for shipping, that income is included in the 1099-K. It’s your job, as the business owner, to keep track of all of your business expenses and report them on your Schedule C along with your tax return. If you don’t, the IRS will think you owe taxes on the entire amount reported on your 1099-K!

Speaking of the IRS, they will be matching the total reported on your 1099-K with the gross income you report on line 1 of your Schedule C this year. If you happen to make a mistake and say that you made less income than your 1099-K reports, there will be consequences. They could be anything form a letter from the IRS requesting more information right on up to an audit. So don’t ignore the 1099-K if one should appear in your mailbox!