Hi! Fellow shop owner here. I am going to write some info to share what I have learned and also to say "it's not perfect" (that will be at the very end). OK so here's what I have learned by painstakingly trying to reconcile this tax season (and now I will do it every month to make my life easier for next year).
1. 1099-K transactions mean all "inbound" Credit Card transactions and excludes all refunds issued. My shop is online, but as an analogy, I like to imagine I have a cash register in front of me and I swipe a customer's credit card. Each time I do that, that total value including sales tax, shipping and product values, gets added to a continuously increasing 1099-K value for that month.
2. If later the customer returned a product, and I refunded them any value at all, that doesn't count. 1099-K only cares about original inbound CC "swipes".
3. When using Shopify (and PayPal Checkout go to your PayPal account to reconcile orders that used PayPal), it should be noted that the IRS considers the value in box 1a of the 1099-k form to be "Gross amount of payment card/third party network transactions". Since you are probably using the online Shopify CC system that's why it is considered 3rd party.
4. Third party network transactions can also include when you have your customers use Shop Pay Installments (but not always, let's get into that).
OK now let's look at why it seems to be off even when you feel like you added up all of your "inbound only" transactions/orders.
1. The customer used Shop Pay Installments INTEREST BEARING. If you have Shop Pay Installments, customers actually have a few ways they can use it. They can do split payments or longer Interest bearing versions. For "split payment" form of Shop Pay Installments, the customer actually has a few weeks (maybe 6) to make regular payments and they pay no interest. I think usually the payments are every 2 weeks (bi-weekly) to coincide with the typical person who receives paychecks every 2 weeks. Those type of Shop Pay Installment purchases DO COUNT towards your 1099K transactions. Again Split Payments, paid every 2 weeks, usually paid off in 6 weeks, 0% interes DO IN FACT COUNT as a 1099-K transaction.
2. There's a 2nd way people can use Shop Pay Installments...Longer Interest Bearing version. They choose a longer pay off option where maybe they will pay it off over 6 months or longer and they don't make bi-weekly payments but instead make monthly payments AND they will pay interest (hence interest bearing) for this longer pay off form. These DO NOT count as a 1099-K transaction. These are considered "interest bearing" and are looked at like a loan and run through a different banking partner model in Shopify's back end. One other online post I saw said it's possible there may be this longer format version where the customer might have 0% interest but because they are choosing this long pay off method, then it falls under the "loan" look and therefore doesn't count as a 1099-K transaction. Again this version of Shop Pay Installments DOES NOT Count as a 1099-K transaction. (best practice, tag each of your Shop Pay Installments orders with the words "Shop Pay Installments" to make finding them easier).
So, how do you know if a Shop Pay Installments purchase is the short split payment type (counts as 1099K) or is longer payoff option that does NOT count as 1099K? How can you tell? If you look at the details of your order and read the details when it references the Shop Pay Installments, it unfortunately looks identical between the two different ways so it's not helpful. You have to get the 1099K transactions report each month (Finance>Payouts>View Order Transactions>Export, choose 1099K, then dates, then export items) and see the ones that state they are Shop Pay Installments. If those appear in your 1099K report then they must have been "split payment" ones. In your orders, I tag my orders based on how customers pay such has "visa" or "mastercard" or "shop pay installments". That makes it easier for me to later extract out and see them, Then if I have tagged an order as "Shop Pay Installments" but it DOESN'T appear in my 1099K report from Shopify for that month, then I will assume the customer chose the longer pay off "Interest Bearing" Version of Shop Pay Installments, and therefore Shopify looks at it like it's a loan and won't consider it a 1099k transaction.
OK you made it this far. Now let's get to where IT DOESN'T MATCH.
This is where Shopify screws things up and I hope they read this. I have an order that occurred in January 2024. A Shop Pay Installments purchase, let's say for $1520 (a pretty specific number). However, that order DOES NOT appear in the Shopify Reports for 1099K transactions. It's the report you get from going to Finance>Payouts>View Order Transactions>Export select the radio button for "1099-K transactions", select the dates you want, and click "Export items". With my explanations above, if the Shop Pay Installments purchase was "split payment" then it would appear in this report and count as a 1099-K. And if it was the longer payment form ie Interest Bearing, then it will NOT appear in this report. So last January 2024 I had that order and the order DID NOT appear in this report, so that means the customer must have chosen to take their time and pay it off monthly because the Shopify Report didn't have that specific transaction (just like they won't show the PayPal purchases). BUT, when I got the 1099-K formal form, the IRS looking one, the value was off, and how much was it off? Exactly $1520 too much. Meaning, Shopify reported to the IRS that that order for $1520 WAS counted as a 1099-K transaction, even though, Shopify's OWN reporting system via Finance>Payouts etc... doesn't include that purchase. Other months did the same thing here and there. Sometimes the IRS form matched Shopify's reports such that they did count for the Shop Pay Installments and so did the report. And in some cases where the report didn't count a shop pay installments purchase and the IRS form Also didn't count it. So those were fine, meaning it counted them when it should have and it didn't count them when they shouldn't have. But there were times when the IRS form counted a Shop Pay Installments purchase but the Shopify Report didn't show that transaction. That's what's frustrating. Which one was right? Was the IRS form the right one or the Shopify report the right one. I don't know.
Now to make it even more crazy, remember in the beginning I said that the 1099-Ks are "GROSS amount of payment card/third party network transactions", meaning all inbound transactions and doesn't care or count for refunds? Well what happens when a Shop Pay Installments person decides to return an item and wants a refund? Well, the IRS form actually adjusts for that, even if the adjustment occurs the following month. I saw that happen. But that doesn't occur for normal CC refunds, only for Shop Pay Installments refunds.
I hope you read all of this and others read and Shopify reads it because what they are reporting to the IRS doesn't always match their own reports.
Good luck.
p.s. Here's another article: 1099-K Forms (Updated for 2023 Tax Season)
https://community.shopify.com/c/accounting-and-taxes/1099-k-forms-updated-for-2023-tax-season/m-p/15...
