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What Online Business Owners Should Know about IRS Form 1099-K

Updated for Tax Year 2021 • June 24, 2022 04:45 PM


OVERVIEW

If you accept credit card payments online, you may have to report payments that you receive from credit card or third party processors on your 1099-K forms.


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Key Takeaways

•   Form 1099-K includes the annual gross amount of all reportable payment transactions made through a payment card or third-party payment network.

•   Third-party network settlement organizations generally include banks or other organizations that process credit card transactions for a merchant.

•   These organizations also include services like PayPal, Venmo, and CashApp, which settle payment card transactions.

•   Online auction payment facilitators and marketplaces that connect independent sellers with customers, such as eBay and Etsy, or gig-worker platforms like Uber and Lyft also generally act as third-party settlement organizations.

What is a Form 1099-K?

Form 1099-K, Payment Card and Third-Party Network Transactions is an IRS form used to report credit/debit card transactions and third party network payments. Minimum transaction reporting thresholds have decreased from $20,000 in years prior to 2022 to $600 for years 2022 and after, making several more small business owners, self-employed individuals, gig workers, freelancers, and independent contractors more likely to receive 1099-K forms compared to previous years.

If you’re self-employed or work as an independent contractor, you typically report your income, including that from forms 1099-K, on Schedule C of your Form 1040, individual income tax return. If your business is organized as a pass-through entity like a multi-member LLC, LLC electing to be treated as a corporation, S Corp or Partnership, you’ll need to report this information on your Form 1120, 1120S or 1065.

What is the purpose of a 1099-K?

IRS Form 1099-K came into existence as part of the 2008 Housing and Economic Recovery Act—even though it has nothing to do with housing. This form was created in 2012 for the 2011 tax year to ensure that individuals and businesses report all of their income for tax purposes. It requires credit card companies, such as MasterCard and Visa, and third-party processors, such as PayPal and Amazon, to report the payment transactions they process for businesses. Therefore, if you accept credit card or electronic payments, you may end up with a 1099-K at the end of the year from each payment processor that summarizes all of your sales transactions.

Who gets a 1099-K?

Most retailers and businesses that accept online credit card payments and other electronic payments from customers will receive a 1099-K if its annual processing activity has met the following guidelines:

  • For years prior to 2022, if you’ve received payments through a third party processor over $20,000 AND if there were more than 200 individual transactions.
  • For these same years, in limited instances: If the sales volume is over $600 per year
  • For years 2022 and onward, if you’ve received a total of payments through a third party processor exceeding $600 and ANY quantity of transactions

If you have met these criteria, you'll receive a copy of the 1099-K in the mail by January 31 of the following year. The IRS will also receive a copy of all the 1099-K forms that are issued to you. If you believe you should have received a 1099-K and haven't received one by that date, consider contacting the processor to find out if one has been prepared for you. If the processor didn't prepare a 1099-K, you still need to report all of your income.

What is the 1099-K threshold for 2021?

You should receive Form 1099-K by January 31, 2022 for the 2021 year if you received payments:

  • Originating from payment card transactions (for example, debit, credit, gift, or prepaid cards), and/or
  • When payment settlements occur for third-party payment network transactions on platforms like Venmo; gig-worker platforms like Uber and Lyft; or online marketplaces connecting independent sellers to customers like eBay or Etsy, above the following thresholds:
    • For returns for calendar years prior to 2022:
      • Gross payments exceeding $20,000, and
      • More than 200 transactions

What is the 1099-K threshold for 2022?

Through the American Rescue Plan Act, Congress sharply reduced the reporting threshold for which third-party payment networks are required to issue a Form 1099-K to $600 and eliminated the transaction quantity requirement. The changes became effective for calendar years beginning after December 31, 2021.

As a result, more workers and sellers will likely receive 1099-K forms than before for reporting years 2022 and afterward. The law also clarified that only payments made for the purchase of goods and services are reportable third-party network transactions from March 11, 2021, and later.

The new 1099-K threshold for 2022 (for returns for calendar years 2022 and afterward) is:

  • Gross payments exceeding $600, and
  • Any number of transactions

Beware of accepting nontaxable payments via card or payment network

If you use a credit or debit card reader or third party app such as PayPal in your business, you should avoid using it for non-business purposes. If you do, these payments will most likely be included with your other payments received for your business and show up on your Form 1099-K unless the payment processor has a system for separating business and personal transactions for you.

For example, if you split costs with a family member, roommate or other non-business acquaintance through a cost-sharing situation, you wouldn’t want to use your business payment card reader. The payment settlement entity likely wouldn’t be able to differentiate the business payments from the non-business payments. These payments received for splitting costs with someone generally aren't considered taxable income. These are considered non-taxable payments and shouldn’t be reported on your tax return as income.

1099-K vs. 1099-NEC vs. 1099-MISC

While the $600 minimum reporting thresholds for 2022 and onward are the same, these forms actually report different information. Credit card companies, third-party payment processors and online platforms that process payments are required to send 1099-K forms to report payments they processed during the tax year for merchants.

Prior to the introduction of the 1099-K, many businesses were required to provide a 1099-MISC form to many of their suppliers if they paid them more than $600 annually. If the transactions occurred through credit card or third-party processors, there's a possibility of these transactions being reported on both the 1099-K and 1099-MISC forms.

The IRS has directed that any 1099-MISC payments that are reported on a 1099-K should be reported on the latter form only, and that a 1099-MISC need not be issued. However, in practice, many companies are still providing 1099-MISC forms. To avoid double taxation, keep detailed sales records and deduct any payments also reported on the 1099-MISC form from the 1099-K payment before reporting them on your tax return - and be prepared to explain the deductions to the IRS.

1099-MISC forms are used to report payments made to others during a trade or business. Previously, companies reported payments for nonemployee compensation on Form 1099-MISC. However, the IRS reintroduced Form 1099-NEC for reporting this information when an independent contractor, self-employed worker or gig-economy worker is paid $600 or more by another business in a tax year. Any payments falling under the reporting requirements of the 1099-NEC typically would not also be included on a 1099-K nor on a 1099-MISC.

How do I report 1099-K forms on my tax return?

If you receive a Form 1099-K, it generally includes the gross amount of all reportable payment transactions from a payment processor. If you meet the reporting threshold for the given year from one or more payment processors or third-party settlement entities, you'll receive a separate 1099-K from each processor reporting the payments you’ve received. The gross amount reported on your 1099-K often doesn’t include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.

Even if you don’t receive a 1099-K from a payment settlement entity due to failing to exceed the minimum reporting threshold, or for any other reason, you should still report all payments received to reflect the actual amount of money earned in your trade or business. Likewise, you should also include all forms of income unless specifically excluded, including cash, checks, gifts and/or discounts, goods or services received in lieu of payment.

Once you’ve gathered all of your business income, including that reported on Form 1099-K, you'll use this information on Forms 1120, 1120S or 1065 if your business is organized as a corporation or partnership, or on Form 1040 using Schedule C if operating as a sole proprietor or Schedule F if operating a Farm.

How to correct information on a 1099-K

In some cases, you may receive a Form 1099-K that doesn’t belong to you or is incorrect in the total gross payment amount being reported. This can happen for common errors like:

  • when you report business income on Form 1120, 1120S or 1065 but the Form 1099-K is in your name and Social Security Number
  • If you shared your credit card terminal with another person or business
  • If you bought or sold your business during the year
  • You changed your business entity structure during the year
  • Your merchant category code (MCC) fails to describe your business

Review your business records to check the gross receipts reported on your Form 1099-K are accurate and your tax information is correct. If the information found on your 1099-K doesn’t match your records, consider contacting the payment settlement entity (PSE) that issued the form.

To contact the PSE, their name and telephone number should be provided on your form in the bottom left below their address information. If the information is  incorrect, request that they issue a corrected Form 1099-K.

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