This is a contributed article by C.W. Kimple. It is for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax advisors.
It’s time to file your 2020 tax return! Here’s a snapshot of how to report your sales and earnings from Dumpling on your tax return.
What to look for
Business owners will receive an End-of-Year Tax Summary via e-mail from Dumpling (see below).
You’ll also receive a Form 1099-K if you exceeded both $20,000 in total sales AND 200 transactions in 2020. Dumpling will mail your Form 1099-K to your address by January 31, 2021.
Even if you don’t receive a Form 1099-K from Dumpling, you are still responsible for appropriately reporting your 2020 sales and earnings to the IRS.
What is a Form 1099-K?
Form 1099-K is the document Dumpling uses to report to the IRS how much money you earned in 2020 if you met the earnings and transaction thresholds mentioned above. Here’s what the form looks like:
What is Dumpling’s End-of-Year Tax Summary?
Below is an example of a Dumpling End-of-Year Tax Summary. Note that the Total Invoice amount on the End-of-Year Tax Summary matches Box 1a of the 1099-K.
Note that the Groceries and Fees dollar amount represents your expenses that are recorded through Dumpling’s app. Further in this article we’ll discuss other expenses that you might have had while running your business that you’ll also want to report on your tax return.
What do I do with the 1099-K and End-of-Year Tax Summary?
If you’re an individual, sole proprietor or single-member LLC, then you’ll likely report your income and expenses on your Form 1040, Schedule C. Below are several sections of Schedule C where your income and expenses will be recorded. From your End-of-Year Tax Summary, notice that the Total Invoices amount goes on Line 1. The Groceries and Fees amount goes on Part IV, Line 27a. Before you add additional deductions, net earnings will also match Line 31.
Now that we’ve discussed how Dumpling reports your earnings and some of your expenses on Form 1099-K and your End-of-Year Tax Summary, and taken a quick glance at where on a Schedule C you’ll put your earning and expenses, let’s take a look at how you’ll enter all this information into your tax software program.
How to enter information into your tax software program
Here’s an example of where to record your information in TurboTax. Step 1: Find the Income & Expenses section. Click on edit.
Step 2: Enter “1099-K” in the “Type of income” field. Enter the amount from your Form 1099-K, Box 1a, in the “Amount” field:
Does your 1099-K amount seem pretty high?
Don’t worry! The dollar amount that appears on your 1099-K isn’t the money you’ll pay taxes on. Let’s talk about the expenses you’ll also report on your tax return.
From the End-of-Year Tax Summary, the Groceries and Fees amount is an important expense to report on your tax return. In this example, $15,000.45 is an expense. Subtracting that amount from $25,000.12 of income results in a profit of $9,999.67.
Is the $9,999.67 the amount you pay taxes on? Not necessarily. There are still quite a few other expenses you can report on your tax return.
Additional expenses you can report on your tax return
Money you spent directly related to your delivery business may be deducted on your tax return. Here are some of the more common expenses of Dumpling business owners:
- Dumpling monthly subscription fee (Pro or Tycoon level)
- Personal protective equipment
- Marketing expenses such as Facebook advertising, business cards, car
- Supplies such as reusable bags, insulated bags, coolers, carts
- Membership fees for stores such as Costco and Sam’s Club
- Road and bridge tolls
- Parking fees
- Cell phone and data plan expenses
In TurboTax, the expenses section is directly underneath the income section:
Click on “Add expenses for this work” and add all the expense deductions for your business.
Important: Don’t forget to add the Groceries and Fees expense amount from your End-of-Year Tax Summary. In TurboTax, this expense is listed as “Other miscellaneous expenses.”
Let’s talk about mileage
One of the largest expenses you may have for your delivery business is miles driven in your vehicle. Here’s what you need to know about tracking how far you’ve driven:
- For every mile you drove for your business in 2020, you get to deduct 57.5 cents from your gross income. Click here to view the mileage rates on the IRS website.
- On your tax return, you must report total business miles driven and total overall miles driven. As an example, let’s assume on January 1, 2020 your odometer says 1,000 miles and on December 31, 2020 your odometer reading is 6,000. Let’s also assume you drove 4,000 miles while making deliveries in 2020. On your tax return, you’ll need to report that you drove 5,000 miles overall (6,000 minus 1,000) and 4,000 miles for your business.
- YOU MUST KEEP A REAL-TIME LOG. Every time you drive your vehicle for business purposes, you must write down the date, total miles driven and the purpose of the drive. Your driving activity must be recorded as it happens throughout the year. The IRS does not allow you to “recreate” a log of your driving activity after-the-fact.
How to Handle Dumpling Adjustments
Finally, let’s discuss positive and negative adjustments that are made to your Dumpling invoices.
Positive adjustments – These will be reflected in the total invoices amount on the 1099-K and End-of-Year Tax Summary you receive from Dumpling. It’s your responsibility to track what, if any, of the positive adjustment reflect additional expenses or costs. For example, farmer’s market items you purchased on your personal card may be deductible. You would report these additional costs as an expense on your tax return.
Negative adjustments – If you’re making a negative adjustment, such as a discount, this has already reduced the total sales dollar amount reported on the 1099-K and End-of-Year Tax Summary. This is therefore not something you need to be concerned with for tax return purposes.
Where do all these numbers come from?
Here’s an example of what a typical Dumpling order looks like on a mobile device:
The total amount of the invoice, $141.99 in this example, is what you report as income on your tax return. Adding all your invoices throughout the year should total the dollar amount on your Form 1099-K.
From the $141.99, you would then subtract your expenses. Here’s what it looks like in this example:
Income (Total Invoices): $141.99
Cost of Groceries ($100.00)
Platform Fee ($5.00)
Processing Fee ($4.68)
Profit/Taxable Income $32.31
So in this example, total income is $141.99, total expenses are $109.68, leaving you with a profit of $32.31.
(NOTE: The total of these expenses that appear on Dumpling invoices is what shows up as “Groceries and Fees” on your End-of-Year Tax Summary.)
The profit of $32.31 is the amount that Dumpling deposits into your bank account.
Disclaimer: The information contained in this Guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this Guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this Guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.