Your solution is option #2. If you would happen to receive a letter from the IRS expecting more income to have been reported, you can respond with a letter back that the amount from 1099-K was already included in your sales income.
When you have a small business, you typically won't be using the 1099-K entry. Rather, the amounts from 1099-K will already be included in your sales. You can enter the income reported on your Form 1099-K as self-employment income on Schedule C, the same as you would report cash, checks, etc.
See this article for more information: IRS Form 1099-K: What Online Business Owners Should Know
