Tax Advice

Form 1099-K: Essential Information for Small Business Owners

If you accept payments through a payment app or any third-party payment network such as PayPal, Venmo, or Cash App, you should be aware of the 1099-K form and how it affects your income tax return. 1099-K is crucial for reporting business income and understanding your tax obligations.

A Quick Note: Changes to Who Receives a 1099-K

In 2022, the IRS announced they were going to require online payment processors and credit card companies to issue 1099-K forms to business owners who process over $600 annually. Previously, this was only to owners processing over $20K and had over 200 transactions. The IRS delayed this change and decided on a phase-in approach.

The approach kept the 1099-K threshold at $20,000 in 2023, but lowered it to $5,000 for 2024. It is planned that the threshold will be lowered to $600 in future tax years.

So some business owners may get a 1099-K form for the first time – including you if the payments you received via third-party networks exceed $5,000. This means you need to ensure you’re keeping both income and expense records to reconcile this form when submitting taxes.

What Is Form 1099-K?

Form 1099-K is issued by third-party settlement organizations or payment settlement entities to report payment transactions received by businesses or individuals. This form is required when gross payments exceed the reporting threshold set by the Internal Revenue Service (IRS). In 2023, this threshold was updated to include any business that processes over $600 in payments through a payment processor or third-party payment network.

Previously, the IRS required a 1099-K only for business owners processing over $20,000 in gross payments and at least 200 transactions annually. However, the new rule simplifies reporting by applying the lower threshold across all payment methods. As a result, small business owners and individuals who receive personal transactions through these networks may now receive a 1099-K form for the first time.

For example, say you own an online store and receive $10,000 via PayPal and $15,000 from credit card transactions. In the prior calendar year, you may not have received a 1099-K since the total from each PSE was under $20,000. However, going forward, you’ll want to keep an eye out for a 1099-K from each payment processor.

Who Receives Form 1099-K?

A 1099-K form is sent to any individual or business that has received gross payments exceeding the IRS’s reporting threshold through a third-party payment network or payment processor. This includes income received for services or goods sold, whether through payment apps, credit card companies, or other third-party organizations. Individuals using these platforms for personal transactions may also receive a 1099-K, depending on their total payment volume.

What Information Is Included on Form 1099-K?

Form 1099-K is an essential document for small business owners who accept payments through third-party payment networks like PayPal, Venmo, and Cash App. This form, issued by payment settlement entities (PSEs), reports your gross receipts from payment transactions. It is crucial to understand the details on this form to accurately file your income tax return and ensure compliance with IRS regulations.

Key Details Included on Form 1099-K

1. Tax Identification Number (TIN): This could be your Social Security Number (SSN), your individual taxpayers Identification Number (ITIN), or Employer Identification Number (EIN). This information identifies you as the recipient of the reported income and is necessary for matching income records with your income tax return.
2. Gross Amount of Payments: The gross payments you received during the tax year from the payment processor or third-party payment network are listed. This amount represents all payments received without deducting any associated transaction fees.
3. Merchant Category Code (MCC): A unique 4-digit code assigned to your business that classifies your goods or services. This code helps the IRS and payment processors identify the type of business you operate.
4. Number of Payment Transactions: This is the total count of individual transactions that generated income. It provides an overview of how many separate payments you received through the third-party payment network.
5. Federal and State Income Tax Withheld: If applicable, any tax withheld from your payments will be noted on the form. This is particularly relevant for self-employed individuals and small business owners.
6. Contact Information: This section may include your address and phone number, which helps ensure correct identification and communication.

Why the Details on Form 1099-K Matter

Form 1099-K is an informational document that aids in the accurate reporting of business income. The gross receipts reported are essential for your income tax return, as they provide a starting point for calculating your taxable income. Inaccuracies on this form can lead to discrepancies in your individual income tax return filing, which may result in backup withholding or potential audits by the IRS.

What Should You Do With Form 1099-K?

Like with all tax forms, you’ll want to take the time to ensure all of the information reported is correct.

Compare the total amount of payments that was reported by the PSESs with your credit card records and merchant statements. Ensure the amount they are reporting matches your payment card receipt and other records because this is what they’ve reported to the IRS. If you find any errors, notify the sender immediately.

You’ll also want to check that they’ve included the correct TIN and merchant category code on the form.

Once you’ve ensured that the 1099-K is accurate and you’ve reflected this amount correctly on your income tax return, keep a copy of it with your tax records.

If you’re self-employed, the income that is reflected on your 1099-K is reported on your Schedule C. Just like with your 1099-NEC, if you’ve been keeping accurate books, this business income received should already be included in your records. You won’t need to add the amount from the 1099-K to your reported income—doing so would cause you to double-count your income. Just ensure it’s been properly recorded as taxable income on your income tax return.

Here’s a checklist to set you up for success:

• Verify Accuracy: Ensure that the reported gross payments align with your own records. If any inconsistencies are found, contact the payment processor or payment network to request a corrected form.
• Report All Business Income: Even if some transactions are for personal items or nontaxable payments, it is vital to report the total income shown on the 1099-K on your income tax return.
• Track Transaction Details: For precise tax reporting, maintain records of all payment transactions and relevant documentation to substantiate deductions for business expenses.

What If the Amount on Your 1099-K Doesn’t Match Your Records?

If you receive a 1099-K and the number they’ve reported as gross payments doesn’t match your records, first ensure you’re looking at the right amounts. The 1099-K is reported in gross amounts, but your monthly statements might be reported in net amounts—refunds and credits are not reported on the forms. Ensure you’re looking at the correct total.

If you still believe there is an error on your 1099-K, you should contact the PSE that is listed on the 1099k form itself. They can help you investigate the difference. Keep all of your records as documentation of the discrepancy.

One common error to watch out for is duplicate transactions. If a client pays you via credit card, they’re not supposed to also include this amount on the 1099-NEC they issue at year-end. However, some small business owners aren’t familiar with the reporting rules and issue a 1099-NEC to anyone who received payments greater than $600, regardless of the payment method used.

If a client pays you via credit card and issues a 1099-NEC for those payments, you could have twice the business income reported to the IRS on your behalf. Reach out to your client and ask them to issue a corrected Form 1099-K to report payments.

What If You Don’t Receive a 1099-K?

If you think you should have received a 1099-K but didn’t, reach out to the company that should have issued it. They may have sent it to the wrong address or have incorrect information about the reportable payment transactions you received.

Regardless of whether you receive a 1099-K or not, all income you receive should be considered taxable income and be reported on your tax return. That’s why it’s important to keep track of the taxable income you receive using an accounting solution, like FreshBooks.

How Is a 1099-K Different From a 1099-NEC?

The differences between a 1099-K and a 1099-NEC can be confusing. Both report the gross income you received.

Your 1099-NEC form will show how much you received for services provided as a non-employee.

Your 1099-K form will show how much you received from credit card payments and third-party network transactions.

The deciding factor in whether you’ll receive a 1099-NEC or a 1099-K is how you received the income. If you received money via cash, check, or an ACH deposit, you’ll likely receive a 1099-NEC. If you received money from a third-party network (like PayPal), a credit card, or a debit card, you’ll receive a 1099-K if you meet the reporting criteria.

Payments made to you using credit cards or third-party network transactions should not be reported on your 1099-NEC, but instead on your 1099-K.

As a Business Owner Do You Need to Send a 1099-K?

If you’re a business owner who processes payments through a third-party payment network or accepts credit card transactions, you might wonder whether you need to send out a Form 1099-K to report these payments. The short answer is: no, you do not need to issue a 1099-K for payments you’ve made.

Instead, it is the responsibility of the payment settlement entity (PSE), such as payment processors or third-party settlement organizations like PayPal, Venmo, and Cash App, to send Form 1099-K to the IRS and to you.

Why PSEs Are Responsible for Issuing Form 1099-K

As a business owner, it’s essential to understand that payment settlement entities are obligated by the IRS to issue Form 1099-K to report certain business expenses and income and ensure compliance with income tax regulations. The form serves as an informational document that helps the IRS cross-reference reported gross receipts with your income tax return.

While the IRS expects PSEs to handle this reporting, they also face significant penalties for failing to comply. The penalties for not filing or issuing a Form 1099-K can be substantial, ranging from $50 per missed form to a maximum of $3,532,500 for intentional disregard.

What If a PSE Fails to Send You a 1099-K?

If a payment settlement entity fails to issue a Form 1099-K when they should have, the IRS can impose significant penalties. The penalty for not issuing a required 1099-K can range from $50 per form for minor infractions to much larger fines for cases of intentional non-compliance. For small business owners, the penalties for PSEs failing to meet their reporting obligations can impact the accuracy of your income tax return and lead to discrepancies that could result in backup withholding or further audits.

Should You Send a 1099-NEC Instead?

As a business owner, you’ll send a 1099-NEC in many situations where you pay someone more than $600. Let’s say you hire a freelancer to design a new website for you and they charge $2,500. Whether you send a 1099-NEC to them depends on how you pay them. If you send them a check, you’ll be required to send them a 1099-NEC.

But what if you paid them using credit or debit cards?

Because you paid with a credit card, you won’t send them a 1099-NEC, even though you’ve paid them over the $600 minimum reporting threshold. And you won’t send them a 1099-K. Instead, credit card companies and third-party payment networks are required to send 1099-Ks to report the payments they received from such transactions.

Even though you made the payment, the PSE is required to send the 1099-K.

If you need help figuring out who needs to receive a 1099-NEC, you should work with a tax professional to make sure you get it right.

Other Important Tips for Tax Filing

Being informed about your obligations as a business owner and understanding the role of third-party settlement organizations in reporting payments can help you avoid surprises during tax season. Make sure you are tracking business expenses and have accurate records of your payment transactions to support your income tax returns and maintain compliance with IRS guidelines.

• Consult the IRS: Check the latest IRS guidelines to stay informed about any changes to reporting thresholds or other relevant policies.
• Deduct Certain Expenses: You may be able to reduce your taxable income by claiming business expenses. Examples include transaction fees, equipment purchases, or other costs directly tied to your business operations.
• Record Keeping: Ensure all income and expense records are well-documented throughout the year to support your tax return.

The Bottom Line

As a business owner, you might receive a 1099-K in your business. It’s important to know why you’re receiving this tax form and to double-check that the information matches your records. Credit card companies and third-party processors report business income taxes to the IRS, so getting it right is important.

Understanding the information on Form 1099-K and how it affects your income tax can simplify your tax season and help you avoid issues with the IRS. Consult with a tax professional or refer to resources like How Do I Track Other Income (Non-Invoice Income) in FreshBooks? for more insights.

This post was updated in December 2024.