The IRS Form 1099-K tracks income received through third-party payment methods, like credit credits, PayPal, and other payment services. Here’s what you need to know about this form and how to avoid any surprises come tax season.
1099-K: The Basics
Tax season requires some planning and organization for everyone, and that’s especially true when you’re self-employed. On top of tracking business-related expenses, you’ll likely need to track income streams from several clients.
Form 1099-K tracks payments you’ve received through a payment settlement entity, or PSE. That includes tracking payments made via:
- Credit cards
- Online payment services like PayPal
- And even freelancing platforms like Upwork that manage client payments for you.
Form 1099-K shows the value of the transactions the PSE has processed for you in the past year, as well as any expenses paid on your behalf by your clients.
The IRS requires each payment settlement entity to send you a Form 1099-K by January 31 if it has processed at least $20,000 worth of payments and at least 200 transactions for you in the previous year.
But you still could receive 1099-Ks from some PSEs even when the form isn’t required by the IRS. Many PSEs send 1099-Ks to all their vendors, even if they’ve only processed a handful of transactions and fall well short of the $20,000 threshold.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.
Using the 1099-K Form to Prepare Your Taxes
You’ll need to keep all of your 1099-K forms to prepare for tax time, since each form reports a portion of your self-employment income for the year. Use the information on your 1099-Ks to report both your annual and quarterly income to the IRS. But remember that just because you did not receive a 1099-K form doesn’t mean that you don’t have to report all of the income that you received.
If you’re a solopreneur or sole proprietor, your 1099-Ks count toward your self-employment income, which is subject to the self-employment tax. Record the information from your 1099-Ks as income on your Schedule C.
If your client pays some expenses on your behalf—for example, processing fees deducted even before payment reaches you—your 1099-K should include those expenses, reporting an income higher than you actually received. Don’t worry. You can deduct those fees as business expenses on your Schedule C so your tax liability will accurately reflect your income.
Don’t Mix Business with Personal Finances
Payment settlement entities (PSEs) can’t distinguish between business payments and personal payments, so you should not mix the two. Make sure you do not accept payments for personal expenses on the same accounts you use for business expenses.
For example, let’s say a relative wants to send you $100 for your birthday and uses your credit card reader to do it. The PSE can’t tell that it’s a personal gift instead of a business transaction. As a result, the gift is included in the total shown on your Form 1099-K.
While you don’t have to claim that gift as income (assuming you’re under the taxable gift threshold), any discrepancies between the income reported on your 1099-Ks and the income you report to the IRS may send up red flags, potentially triggering an audit. Avoid the headache by using your business PSEs for business transactions only.
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