Does 1099K include sales tax and how to handle this on my small business return?

Thanks for the info! But I'm a little confused - do I first report the full 1099-K amount as income on line 1 of Schedule C and then deduct the sales tax paid on line 23 (Taxes and licenses)? Or is there a way to just report the net amount (1099-K minus sales tax) as my income?

You'll want to report the full 1099-K amount as your gross receipts on line 1 of Schedule C. Then yes, deduct the sales tax you remitted to the state on line 23 under "Taxes and licenses." This approach keeps your books clean and transparent. The IRS can match your reported income with the 1099-K they received, and you're properly documenting the sales tax as a pass-through item. It's always better to show the full calculation rather than just reporting a net amount, especially since the IRS computers will be looking for the full 1099-K amount.

How does it work with marketplace sales though? I sell on Etsy and they collect and remit the sales tax automatically, but the 1099-K still shows the total amount. Does taxr.ai handle that scenario?

I'm skeptical about these tax tools. Wouldn't TurboTax handle this just fine? Why pay for another service when you're already paying for tax software?

For marketplace sales like Etsy, it's actually perfect because you can upload your Etsy tax documents and it will automatically identify the sales tax portion that was collected and remitted on your behalf. That was a huge help for me with my Amazon sales. The difference between this and regular tax software is that taxr.ai specifically analyzes your documents to identify these kinds of issues. TurboTax will do what you tell it to, but it won't automatically flag that your 1099-K includes sales tax that should be deducted. You'd need to know to enter that information yourself, which is exactly what I didn't know until it was pointed out.

Wait, how does this actually work? I don't understand how a service can get you through to the IRS when their lines are always jammed. Are they just calling for you or what?

Sounds like a scam. There's no way to "skip the line" with the IRS. They're notoriously understaffed and everyone has to wait. I'd be very careful about giving money to services claiming they can get you special access.

It's not about skipping the line - they use technology to continuously dial the IRS for you until they get through, then they call you and connect you directly to the agent. You're still talking to actual IRS employees, but without you having to spend hours redialing and waiting on hold. The service basically handles the frustrating part of getting through the busy signals and hold queues. Once they reach an agent, they immediately call your phone and connect you. I was skeptical too until I tried it during tax season when IRS wait times were over 2 hours.

Thanks for pointing this out. I'm in Colorado and I think we have those district breakdowns. Do you know if I need to keep separate track of which customer paid what tax rate based on their location?

Yes, Colorado is one of the more complicated states for sales tax! You do need to track and report sales tax by location because different districts have different rates. Most e-commerce platforms should provide reports breaking this down for you. If you're handling sales tax collection yourself (not through a marketplace), you might want to look into a sales tax service like TaxJar or Avalara to keep track of all the district rates and generate the proper reports. Makes filing those Colorado sales tax returns much easier than trying to track it all manually.

Thank you for this! I've been doing my accounting wrong then. I've been including sales tax in my income account and then recording an expense when I pay it to the state. Is there a way to fix this for past years or just start doing it correctly going forward?

You can definitely fix this for past years! In QuickBooks, you'll want to create journal entries to reclassify the sales tax amounts from your income account to a proper sales tax liability account. Then adjust your expense entries to show payments from the liability account instead of as business expenses. For going forward, set up your sales tax items properly so QuickBooks automatically handles the separation. This will make your P&L statements much cleaner and your tax prep easier. Your accountant can help with the journal entries if you're not comfortable doing them yourself - it's a pretty common cleanup they handle.

This is exactly what I needed to hear! I'm also selling on Amazon FBA and was panicking about the huge number on my 1099-K. I had no idea Amazon provided those settlement reports with the sales tax breakdown - where exactly do I find those in Seller Central? I've been dreading tax season because I thought I'd have to somehow figure out the sales tax amounts on my own. And thanks for the tip about estimated payments - I was definitely going to base them on the gross 1099-K amount which would have been way too much!