Accounting Treatment for 1099-K that Includes Sales Tax

[Tax Explorer]

Hi,

I have a client with a 1099-K that includes sales taxes collected. Should Line 1 (gross receipts or sales) on my client's business return match the 1099-K or should I subtract the sales tax from the 1099-K to get to the client's true sales amount?

I have seen two different answers to the same question regarding how businesses should handle sales taxes collected and paid to the State. One answer recommended that we not include the sales tax we collect in our gross receipts even though it shows up on the 1099-K. The other response recommended that we should include sales tax in the gross income to match the amount on the 1099-K and then list the sales tax amount under the Tax & License expense category. Which is the correct way to proceed: not including sales tax collected in the gross income figure or including sales tax collected in gross income but also listing the amount collected & paid in the Tax & License Expenses category? Are there any articles or instructions from the IRS about this?

[Just-Lisa-Now-]

If the sales tax collected is included in the gross, then include the sales tax paid as an expense.

[TaxGuyBill]

In most cases it isn't a big deal, but according the the Schedule C Instructions for line 23 (taxes):

You can deduct the following taxes and licenses on this line.

State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you must also include the amount collected in gross receipts or sales on line 1.

Do not deduct the following.

State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6.

I'm not sure about other states, but my state imposes it on the buyer, then the seller collects it and pays it over to the state.  That means they would NOT put it on Line 1 or deduct it as an expense.

https://www.irs.gov/instructions/i1040sc#en_US_2023_publink24329wd0e1722

[sjrcpa]

I agree with Bill.

How much does this matter here?

A taxpayer reports all of their Gross Income. I find it hard to believe that the only income earned is on this one 1099-K. 

[JRC]

If included in gross receipts, deduct as sales tax expense. 1099K's are more recent than most other tax rules. Document your entry.

[Futch2010]

I have the same scenario, and my client has less than $10K in cash/checks while having $176K in a 1099; most sales are web related. The sales tax exceeds $13K so I'm not sure how to handle this.

[bkpng0319]

Sales Tax Collected is NEVER an Expense- it is  PAYABLE to government- now if the sales tax collected are included in the 1099K your Sales is overstated by the amount of Sales Tax Collected.

JE#1

Dr. Cash Received           10,650.00

      Fees Charge                   50.00

               Cr. Sales -Taxable (1099K amount Sales Tax included) ex.   $10,700.00

JE#2

Dr. Sales-Taxable (Sales Tax)   700.00

        Cr. Sales Tax Payable               700.00

To record Sales Tax charged to customer.

JE#3

Dr. Sales Tax Payable     700.00

     Cr. Bank(Cash)(Credit Card)   700.00

Payment made next month.

Please comment/advise/your thought.

Thank you

[Accountant-Man]

If you are worried about Sales matching the 1099-K, then include it in Sales and deduct it somewhere. Otherwise the IRS matching program will kick out a discrepancy.

EG $1,000 gross sales and $66 sales tax collected. Is it $1,000 sales(the correct sales amount) or $1,066 sales less "expenses" of $66?

4 sales tax returns combined = $1,000, not $1,066.

[bkpng0319]

Yes that is why Sales is as per 1099k…in JE#1..

then AJE-JE#02..to record the payable. We have to reduce Sales since it is not fair to overstate your sales..right?
Sales Tax is NEVER an expense— it is Payable to the Gov’t.

I think IRS should make this right.

[BobKamman]

Schedule C is a tax form, not an accounting ledger.  

When all else fails, read the instructions (Schedule C)--

Line 23
You can deduct the following taxes and licenses on this line.
• State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you must also include the amount collected in gross receipts or sales on line 1.

[bkpng0319]

Hi Bob.,

I am not referring to Schedule C - If your Journal Entries were correct - Schedule C will be correct too, since your Schedule C reference is your financial statement.

May I ask how are you going  journalize a Sales stated in 1099K where Sales Tax were included in the 1099K.- ( Remember- Sales Tax is NEVER an expense- it is payable to the government).

For your advise/comment.

Thank you.

[BobKamman]

I come here to answer tax questions, like the original poster's:  "Should Line 1 (gross receipts or sales) on my client's business return match the 1099-K"  I've never taken any accounting courses.  

[bkpng0319]

Thank you.