My 1099K includes sales taxes I collected as part of my business. Should I subtract the sales tax from my gross income even though it will differ from my 1099K?

[shannon2]

I have seen two different answers to the same question on this site regarding how business owners 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 income even though it shows up on the 1099K. The other response recommended that we should include those dollars in the gross income (as indicated on the 1099K form) and then list the sales tax amount under Tax & License expenses. That seems like a great way to avoid reporting a different income than what is shown on the 1099K form, but TurboTax did not list "state sales tax" as an example of appropriate items to be listed in the "Tax & License Expenses" section. Which is the safer way to go: 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 section? Thanks for you help!

[LeeM]

No, you should enter the income as it appears on the 1099-K, as the IRS receives the same information and will look that it matches your return.

You can then enter the sales tax amount under Tax & License expenses.

[shannon2]

Thank you for the quick response! Just a friendly suggestion: it would have been helpful if TurboTax had listed "sales tax collected and paid" as an example under Tax & License Expenses. That little bit of confirmation would have made it perfectly clear how to handle sales tax. Thanks again!

[LeeM]

That's a great idea. I will pass your comment on.

[SGK]

No, sales tax is not reported in gross receipts. Read the Publication 334. couple of excerpts below...

If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local
governments, you generally do not include these amounts in income.

If you are in a business, you may receive a Form 1099-K representing total dollar amount of total reportable payment transactions. This may not be the amount you should report as income, as it may not include all the receipts and it may include items that are not included in your receipts (such as sales tax).

[sgerenser]

LeeM, your response re: putting sales tax as Tax & License expense is incorrect.

As SGK stated as well, sales tax should be subtracted from your income. Sales tax collected (and later remitted to the state) are neither income (when collected) nor an expense (when paid to the state). Per IRS publication 334: 

Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income.

The approach I am taking is checking the box in TurboTax that says "This amount in box 1a is too high or includes some personal transactions" and adjusting it by the amount of sales tax collected. That way I still include the exact amount on the 1099-K, but subtract out an amount that is not income as far as the IRS is concerned.

Source: Just a small business owner doing my taxes, not a CPA. But this is the only approach that makes sense to me and matches up with IRS guidance. Also amazed that there is so little definitive information on this topic out there after hours of research.

[VolvoGirl]

See 1040 Schedule C instructions page C-9 line 23
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

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.

[sgerenser]

That is contradicted by publication 334, page 36, that has a CAUTION icon and says:

Do not deduct state and local sales taxes im-

posed on the buyer that you must collect and pay

over to the state or local government. Do not in-

clude these taxes in gross receipts or sales.

https://www.irs.gov/pub/irs-pdf/p334.pdf

I guess the difference is "imposed on the buyer" vs "imposed on you as the seller" State sales taxes in the U.S.  are generally imposed on the buyer not the seller. So the advice in pub 334 applies for most cases of state sales tax. The note that you linked sounds like it applies to other types of sales taxes that are imposed on the seller of a good (off the top of my head, I think perhaps a seller of gasoline where a sales/excise tax is built into the price might be an example of this).

[njohnson134]

Regarding this excerpt from Publication 344 (2024):

'If you are in a business, you may receive a Form 1099-K representing total dollar amount of total reportable payment transactions. This may not be the amount you should report as income, as it may not include all the receipts and it may include items that are not included in your receipts (such as sales tax).' 

No where before or after that statement have I found and explanation of what to do in that case. I'm not in any way, shape or form a tax professional , but to me, it seems implied that you simply enter in the correct amount (gross receipts, without sales tax), which will then differ from the 1099-K form in question. So it sounds like the IRS is not matching generator and recipient data as most of us assume?

[LeticiaF1]

Per IRS Publication 344, "If you collect state and local sales taxes imposed on you as the seller of goods or services from th..." 

This same publication also states that "State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income."

Per this, you should include sales tax in gross sales, and you will have to deduct the sales tax collected.

@njohnson134

[njohnson134]

Here are the two statements together (exactly as they appear, one after the other) in 334:

1. ‘If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts.’

2. ‘If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income.’

The difference I'm seeing is 'imposed on seller' and 'imposed on buyer'

My particular use case: My wife, a sole proprietor photographer (or ‘seller’) is required to charge each client (the ‘buyer’) sales tax on the total value of a photoshoot session. We are then required to turn over that tax to the state. So I would think the second statement (imposed on buyer) would be a more accurate guideline to follow, which means I would not include the collected sales tax as part of her income. 

But I don't understand what the use case scenario of statement 1 would be - can someone give me an example?

[IsabellaG]

An example would be Arizona, which imposes a "transaction privilege tax" on sellers for the privilege of doing business in Arizona. The seller, of course, can pass this tax on to the buyer. 

[Doug118]

What I did was to report it on the "Enter Business Expenses Not Yet Reported" page.  That comes after the "Enter Your Business Expenses" page which has no matching category.  I described the expense as "Sales tax collected and reported on 1099-K".

TurboTax should have some way of doing this on the 1099-K page -- i.e. ask you if the "Gross amount of payment card/third party network transactions" includes sales tax, processing fees, or any other non-income item typically reported in box 1a.

[Doug118]

The description in box 1a says "gross amount of payment card/third party network transactions", so if a sales tax is included, then it is part of the gross amount, so adjusting the amount as "too high" doesn't sound right. 

I put the amount in "Enter business expenses not yet reported" and labeled it  "Sales tax collected and reported on 1099-K".  That's not great either, because it's not a business expense.

Maybe the guidance is somewhere on the TurboTax screens, but I didn't see it.

[ThomasM125]

If you go by the letter of the law, you would not include sales tax collected from a buyer in sales, as you are simply holding that money to be turned over to the government. This is the way if was historically reported. 

For practical purposes however, it would make more sense to include the tax in sales if it is reported that way on the 1099-K form. Since the form 1099-K is a relatively new phenomena, I suspect the IRS will come to some accommodation in the future that will allow for the sales tax to be reported separately on the Form 1099-K. In the meantime, either way to report it will result in the correct net income being reflected on your tax return so it may be up to each taxpayer to choose the best method that works for them.