Why your Amazon 1099k Form is different from your financial statement

Navigating the mismatched numbers between your Amazon 1099-K report and what you see in Xero or QuickBooks can be a real headache, especially when you’re scratching your head over where the discrepancies come from.  

Trying to match up all the details between different forms can be confusing and often leads to mistakes. 

Getting a good handle on your Amazon 1099-K report and knowing where discrepancies usually pop up compared to your QuickBooks or Xero file can really streamline the process of getting your accounts in order. This understanding can help you tackle reconciliations more effectively and with less stress and possibly pay less in year-end taxes.

What is the Amazon 1099-K Report?

All third-party payment or online marketplaces, including Amazon, must legally submit a 1099-K tax form each year to the IRS on behalf of third-party sellers who meet certain selling criteria. This report provides the IRS with information about the seller’s online sales.

The Amazon 1099-K report details the total unadjusted gross sales and transactions processed through your Seller Central account. Essentially, it states the total unadjusted gross sales dollars and the number of transactions processed by Amazon Payments on your behalf for the given tax year. This information assists the IRS in confirming you correctly accounted for associated sales income on your tax returns.

However, this is not the amount of money Amazon transferred to your bank account. The form is the amount before inbound shipping, referral fees, FBA fees, storage fees, refunds, and so on. 

The IRS introduced the 1099-K Form as part of the Housing Assistance Tax Act of 2008. This form helps ensure taxes are collected on Amazon income earned from payment processors, online retail, and more.   

Who Receives the Amazon 1099-K Report?

Not every Amazon seller will receive a 1099-K report. For the 2023 tax year, Amazon must submit a 1099-K form for sellers who receive over $20,000 in payments from over 200 transactions for goods or services.

However, the tax threshold will change in the future.

Initially, the reporting threshold for third-party online marketplaces and payment apps like Amazon was going to change to $600 for 2023 taxes. But, the IRS delayed this change for the tax year 2023. The current plan is to phase in implementation in 2024 with a new threshold of $5,000.   

Key Components of the Amazon 1099-K Report

The Amazon 1099-K Report does not show your actual income or profit. Instead, it focuses on gross sales processed. It does include sales taxes collected on transactions.

Some key components of the Amazon 1099-K report include:

• For calendar year
• The gross amount of payment card and third-party network transactions (Box 1a)
• Amount of Card Not Present transactions (Box 1b)
• Number of payment transactions (Box 3)
• Federal income tax withheld (Box 4)
• Monthly breakdown of your sales totals (Boxes 5a-l)

Preparing for Amazon 1099-K 

Before starting the reconciliation process, you’ll want to verify that your Amazon account information is correct and up-to-date. Additionally, you’ll want to check for any updates or changes to Amazon’s policies for reporting 1099-K.

How to Verify Your Account Information on Amazon

Verifying your account information on Amazon can prevent potential discrepancies or delays in your tax reporting. You can follow these steps to make sure your information is correct:

1. Log in to your seller account: You can access your Amazon seller account using your credentials.

2. Go to account settings: Select the “Settings” or “Account Info” section of your seller dashboard.

3. Review personal and business information: Verify that your name, address, tax identification number, and other relevant details are up-to-date and accurate.

4. Make updates as necessary: Make any changes as needed and save your updates.

5. Confirm any changes: If you updated information, you’ll want to confirm that the changes were successfully saved.

Best Practices For Keeping Good Financial Records

You’ll have a smoother tax preparation process and experience by maintaining accurate and up-to-date ecommerce books throughout the year. 

Here are some best practices for keeping your records in order for an easier reconciliation process.   

Related Reading: How SellerVue helps Amazon sellers build more profitable businesses

• Keep your business and personal bank accounts (including credit cards) separate. This makes it easier to track expenses accurately and simplifies tax reporting.
  
• Use accounting software. As an online retailer, shift away from simple manual spreadsheet usage in Google Sheets or just looking at Amazon Seller Central. Instead, use cloud accounting software options like Xero or QuickBooks Online. These platforms make it easier to set up proper accounting reporting and financial workflows. The end result is better financial clarity and more informed decisions. 
  
  Editor’s Note: Not sure whether to use Xero vs. QuickBooks? Check out this guide.
  
• Organize receipts and invoices. Develop a streamlined system for managing both digital and physical receipts for tax requirements. Organizing these by date and type of expense not only makes retrieval straightforward but also minimizes the chances of losing important records and missing out on deductions this tax season. At Bean Ninjas, we recommend HubDoc since it is built into Xero.
  
• Choose the right accounting method. For Amazon businesses, especially those experiencing growth, accrual accounting often gives a more accurate picture of financial health than cash basis accounting.
  
• Customize your chart of accounts. One of the biggest mistakes we see Amazon businesses make is using the default chart of accounts in Xero or QuickBooks. This works okay when you are just getting started, but it is not built for ecommerce businesses. You’ll want to adapt your chart of accounts to better reflect your operations and financial needs. This customization helps avoid inaccuracies in your financial reporting and provides deeper insights into your business performance.
  
  Editor’s Note: If you sell on multiple sales channels and use the accrual accounting method, we also recommend using a tool, like A2X, to sync and automate all of your transaction data.
  
• Monitor Amazon fees. Accurately account for Amazon fees and net sales to prevent overestimations of profits. This is crucial for correct inventory and cash flow management.

• Establish a robust inventory accounting process. Implement a solid inventory accounting process to ensure your stock levels and valuation are accurate. This will help avoid profit overstatements and provide a clear view of your cost of goods sold.
  
• Calculate landed costs correctly. Make sure you are including all related expenses, such as customs and shipping, when calculating landed costs. This ensures your inventory is valued correctly and profits are not overstated.
  
• Make sure you are doing monthly bookkeeping. This not only helps in keeping accurate records but also makes it easier to gauge the financial health of your business and make informed business decisions at any given time.
  
• Reconcile your bank statements regularly. Keep your financial data accurate by reconciling it with your bank statements and other income sources routinely. This practice helps catch and correct errors early, ensuring your financial reports reflect the true state of your business.
  
• Back up your records. Protect your financial data from unexpected events by keeping backups in multiple secure locations. Embracing cloud storage with strong security measures ensures that your accounting records and sensitive data are safe and accessible when needed.

Reconciling Amazon 1099-K with your cloud accounting software

Reconciling your Amazon seller account throughout the year can help you avoid last-minute struggles when filing your taxes. 

Bank reconciliation is essentially a process of double-checking your bookkeeping for accuracy. During this process, you compare your business accounts to your bank statements. Both sets of records should match. If there’s a discrepancy, you’ll need to look closer to determine why.

Ideally, you should reconcile your accounts monthly. Regular reconciliations help you quickly catch errors or suspicious activity so you can solve the issue and take any necessary actions. Additionally, monthly reconciliation helps you understand how your business is doing and makes it easier to prepare for filing taxes.

At Bean Ninjas, we refer to this process as balance sheet reviews.

Embed this video here → https://www.youtube.com/watch?v=O2EGJvOde8g&t=3s 

Common Discrepancies Between Amazon 1099-K and Xero or QuickBooks

Are you struggling to match your Amazon 1099-K to your profit and loss (P&L) statement in Xero or Quickbooks? This is a common problem largely because your Amazon 1099-K reports total gross sales before deductions, but your P&L indicates net profit after expenses and other deductions were made.

Here are some of the common discrepancies that can arise.

Timing Differences in Revenue Recognition

You can have discrepancies in reported income related to differences in how revenue is recognized between Amazon and your accounting software. 

For instance, difference may arise due to:

• Cash versus accrual basis – Amazon may report sales on a different basis than your accounting software, impacting the timing of revenue recognition.
• Payment processing time – The amount of time Amazon takes to process payments and reconcile transactions may vary from your software’s accounting periods, leading to timing differences. For instance, if your business uses Amazon Pay, the sales typically arrive in your bank account up to two weeks later. Financial transactions are often batched together. 
• Cut-off dates – Amazon’s and your accounting software’s reporting periods may have different cut-off dates. This can result in revenue being recognized in different periods, making it important to select dates carefully when reconciling.
• Transaction date differences –There may be slight differences depending on what time zone transactions are being recorded. For instance, if one system is recording times in a standardized time zone like UTC, but another system is using a slightly different time zone it could cause some small variances.

Differences in Handling Returns and Refunds

Your accounting software may handle the reporting of returns and refunds differently than Amazon’s, resulting in discrepancies in sales figures. 

For instance, the gross payment volume amount that Amazon records does not change if you later refund a payment. IRS requirements state that there can’t be adjustments to gross transaction amounts. This is because when you receive a payment, the transaction total becomes a permanent part of your unadjusted gross payment for the year. 

Shipping and Handling Charges

Another potential area of discrepancy may be differences in how Amazon and your accounting software document shipping and handling charges. 

For instance, differences may be due to:

• Including shipping and handling in sales revenue –  Amazon’s 1099-K may include shipping and handling charges as part of the sales revenue. However, your accounting software likely separates these charges.
• Differences in handling shipping costs – Your accounting software likely handles shipping costs differently from Amazon’s 1099-K. This may lead to discrepancies in your expense reporting.
• How taxes are treated – Your accounting software and Amazon may treat tax between shipping and product sales differently, resulting in some variability in reported income.

Amazon Fees and Charges

Amazon fees and charges are another area that can cause discrepancies, especially depending on how your accounting software is configured. Understanding and properly accounting for any Amazon fees is critical to minimize discrepancies in your financial reporting. You’ll also want to understand how your accounting software categorizes and calculates this information to help you during the reconciliation process.

Some common Amazon fees and charges to consider include:

• Referral fees –  These are fees charged by Amazon for each item sold on its platform. 
• Subscription fees –  Subscription fees can include charges for Amazon seller account subscriptions, like monthly subscription fees for professional selling plans. 
• Fulfillment fees – These include charges for warehousing, packing, and shipping services provided by Amazon through the Fulfillment by Amazon (FBA) program.

Missing Transactions

If your accounting doesn’t match your Amazon 1099-K, one possible problem is that some transactions may be missing. For instance, discrepancies can occur if certain transactions don’t sync properly between your accounting software and Amazon. You can check specific transactions to determine if any are missing.

QuickBooks or Xero Account Not Set Up Properly

If your Xero account isn’t set up properly, it can cause discrepancies in your financial reporting. Some common setup issues include:

• Incorrect account configuration –  If your account isn’t configured correctly, information, sales, or tax rates can be misrecorded in Xero, causing errors in your financial reports and tax reporting.
• Incomplete integration – Sometimes, there can be problems with the integration between Xero and Amazon’s API or another third-party app. This can lead to missing transactions.
• Misclassified income and expenses-  Income and expenses can be misclassified if your software isn’t properly configured. For instance, information may be misclassified if you’re using an inappropriate chart of accounts or failing to map Amazon transactions correctly.

Editor’s Note: Looking to get your Xero account set up properly or get a HealthCheck, our team can help. Here’s where you can learn more. 

QuickBooks or Xero Account Not Reconciled Properly

Setting up a regular reconciliation process throughout the year can help you avoid surprises right before tax time. However, if your Xero account is not reconciled properly you can end up having various discrepancies, making it hard to reconcile your Amazon’s 1099-K report.

Some common reconciliation issues include:

• Missing business transactions – Differences may arise if there are missing individual transactions or differences in cut-off dates.
• Bank reconciliation errors – You may have discrepancies if there are errors between reconciling your bank statements with your Xero account, resulting in misstated cash balances and financial reports.
• Duplicate entries –Another area to investigate is whether you have duplicate entries. This could be due to a manual data entry error or configuration issues.

Advanced Troubleshooting Tips When Data Still Isn’t Lining Up

Discrepancies between Amazon data and your accounting software can persist even with careful setup of your accounting software, understanding how information is being captured and reported, and creating a regular reconciliation process. If you still can’t fix the discrepancies, here are two possible solutions that can help.

Use Third-Party Tools for Enhanced Reconciliation

Reconciling your Amazon accounting can be complicated. Accurately accounting for fees, processing time, returns, and more can be challenging when reconciling your accounting software to your Amazon 1099-K report. 

If you’re struggling to reconcile accurately, one option is to use a third-party tool like A2X. These types of third-party tools work between your Amazon Pay account and your accounting system, either QuickBooks or Xero. It uses secure data feeds to share transaction information. 

For instance, A2X for Amazon accurately categorizes all aspects of your transactions, such as fees, refunds, and taxes. It can provide summaries that help you reconcile your Amazon accounting with your accounting software, making the reconciliation process easier and resulting in more accuracy.

Work with a Niche Ecommerce Accounting Form 

Chances are if you are doing over $20,000 a month in Amazon sales, you’d likely benefit from dedicated accounting services by working with a specialist ecommerce accountant or ecommerce accounting firm like Bean Ninjas.

We can help you make sense of your Amazon 1099 K form, navigate complex reconciliation issues, all while ensuring accurate accounting. 

Ready to get help with your ecommerce books? Schedule a free consultation call with our team here.