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).