What is a 1099-K tax form?
IRS Form 1099-K is a federal tax form used to report gross receipts for all reportable payment transactions. The purpose of this form is to ensure that taxpayers are accurately reporting their taxable income received from credit card and digital payment card transactions.
Form 1099-K is used by payment settlement entities (PSEs) and digital payment processors like Venmo, PayPal, Cash App, and Square. When a 1099-K is required for tax reporting purposes, most payment processors and settlement entities are required to send the completed form to you as well as to the IRS.
The reporting threshold for Form 1099-K is set by the IRS and may change over time. Historically, the requirement applied when total payments exceeded $20,000 and 200 transactions in a calendar year. However, legislation such as the American Rescue Plan Act authorized a lower threshold of $600 with no transaction minimum. The IRS has announced phased implementation of these changes. To confirm the current reporting threshold, visit the IRS Form 1099-K page.
What types of payments are included on a 1099-K?
Form 1099-K applies to credit, debit, or gift card payments through a third-party payment processor for goods or services. This includes online payments through Venmo, PayPal, Square, or other digital payment methods like Facebook Pay. When a customer, tenant, or another person uses a different payment method to compensate you (such as paying by cash or check), those payments are not included on a 1099-K.
The reporting threshold per payment processor is an aggregate amount. So, if you had multiple transactions using a third-party payment network and the total amount of those transactions met or exceeded the threshold for the calendar year, the payment processor is required to prepare and send a 1099-K form. Generally, this is true whether or not you consider the payments as business income. However, payments that are truly not business income are not treated as taxable income on your income tax return.
What do I do with a 1099-K?
In general, if you are self-employed, an independent contractor, or a sole proprietor, you are required to report your 1099-K and any other self-employment income using Schedule C on your IRS income tax return. This is also true for gig workers and freelancers, including rideshare drivers.
If you are a small business owner or landlord and you accept payments from customers or tenants through third-party settlement entities, you may receive one or more 1099-K forms for the gross amount of income received in a given tax year if you meet the threshold requirements. In the future, you may receive a 1099-K even if you did not in past years due to threshold changes. To confirm the latest implementation timeline, refer to the IRS website.
If you use small-business accounting software or spreadsheets to track your sales or income, note that the 1099-K forms you receive that include third-party network transactions are likely reporting income you have already tracked separately. Additionally, you may also receive 1099-MISC or 1099-NEC forms for work you performed as an independent contractor. If you were paid through a third-party processor for that work, that gross income could be duplicated on your 1099-K and 1099-MISC forms. Consider reviewing your records or consulting a qualified tax or legal professional to ensure you do not pay taxes twice on the same income.
It is also important to note that the 1099-K form reports gross payments received, not net income. It is your responsibility to calculate business expenses and other allowable deductions separately in order to accurately determine your taxable income. Additionally, your 1099-K may not account for refunds or returns, so it is important to keep accurate business records for yourself rather than relying solely on the third-party processor’s records.
What do I do if I receive a 1099-K but am not a small business owner?
It’s not just small business owners who receive 1099-K forms from third-party payment processors. If you do receive a 1099-K and are not a business owner, don’t discard it assuming it doesn’t apply. In addition to sending the form to you, the payment processor is also required to file it with the IRS.
Form 1099-K includes your Social Security Number (SSN) or Taxpayer Identification Number (TIN), which allows the IRS to link the income back to you as a taxpayer. Failing to report all income could result in fees, interest, or an increased risk of audit if IRS records don’t match your tax return. Additionally, there may be errors on 1099-K forms, including things like incorrect merchant category codes, duplicate forms, or errors in the gross amounts reported.
If you believe your 1099-K contains errors or does not reflect actual taxable income, you can contact the payment processor for correction or consult with a legal professional for guidance on how to proceed. If you have questions about your legal obligations, you can reach out to a Legal Pro for help today.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
