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. Ultimately, the purpose of this form is to ensure 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 PayPal, Venmo, Cash App, and Square. When a 1099-K is required for tax reporting purposes, most payment processors and settlement entities have reporting requirements that require them to send the completed form to you, as well as to the IRS and state tax authorities.
The current minimum threshold for 1099-K reporting requirements is $20,000, and then only if the business or individual also has more than 200 transactions in the calendar year. That means that if you received at least $20,000 in payments and had more than 200 transactions with third-party settlement organizations during the 2022 tax year/calendar year, you can expect to receive a 1099-K form in early 2023. New thresholds will be enforced in future tax years as part of some tax changes that were made in the American Rescue Plan Act. The new payments threshold will be $600 and there will be no transactions threshold.
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, including online payments through Venmo, PayPal, Square, or other digital payments 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 number. 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 think of 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 a self-employed tax filer, or are working as an independent contractor or sole proprietor, you are required to report your 1099-K and any other self-employment income using Schedule C for your IRS income tax return. This is also true for gig workers and freelancers, including Uber and other rideshare drivers. As always, it’s a good idea to talk to a tax professional or tax attorney if you have tax concerns, including questions about how a 1099-K form may impact your personal tax situation.
If you are a small business owner or landlord and you accept payments from customers or tenants who want to pay with a credit or debit card using third-party settlement entities, you may expect to 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 future tax years, you may receive a 1099-K even if you did not receive 1099-Ks for previous tax years and your income has not changed. That is because the reporting thresholds will be lowered from $20,000 to $600 as part of the American Rescue Plan Act. The IRS had planned to roll out enforcement of the new threshold requirement for the 2022 tax year, but recently reversed course. As of the date of this guide, the new 1099-K thresholds will be implemented at some time in the future, so stay tuned here for updates.
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. In addition, 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. Consult your tax accountant about how to handle the double reporting so you do not inadvertently pay taxes twice on the same income. If you don't already have a trusted tax accountant, take advantage of our member discounts for Rocket Tax™ and get matched with a tax pro who will save you time and money.
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 tax deductions separately in order to accurately determine your business tax liability. In addition, your 1099-K may not account for refunds or returns, so it is important to keep accurate business records for yourself rather than relying on the third-party processor’s records.
What do I do if I receive a 1099-K but am not a small business owner?
The reality is that it’s not just small business owners that receive 1099-K forms from third-party payment processors. If you do receive a 1099-K and are not a small business owner, don’t throw it away assuming it doesn’t apply to your situation. 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 tie the income back to you as a taxpayer. Failing to report all income based on current tax law could leave you facing unnecessary fees and fines. It can even increase your risk of being audited as a result of the tax information in IRS records not matching the tax return or information return you filed. There could also be errors in 1099-K forms, including things like incorrect merchant category codes, duplicate 1099-Ks, or errors in the gross amounts reported.
Talk to an attorney or tax professional who can provide tax advice and help you determine what steps to take when filing your taxes. Your tax professional can help you determine whether you are actually working as a gig worker, or whether the income reported on your 1099-K is instead the result of your activity as a reseller, such as someone who sells goods on platforms like Facebook Marketplace or eBay.
If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don't do your taxes™ – Let us do them for you. If you have questions about your legal obligations, contact a Rocket Lawyer network attorney for help today.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.