Getting Paid Through an App? You Should Know About Form 1099-K
If you sell homemade items at craft fairs on the weekends, receive tips via a phone app, or engage in some other sort of business where you accept Venmo, PayPal, Cash App, or certain other forms of payment such as mobile card readers, you probably already know you’re required to report that income to the IRS when you prepare your taxes.
There used to be no real way to trace these payments, so it was left up to the sellers to self-report. That’s why you may have been surprised to receive Form 1099-K in the mail.
Form 1099-K isn’t a new form, but there have been some recent changes concerning when one is required.
IRS Form 1099-K: Payment Card and Third Party Network Transactions, more commonly referred to as “Form 1099-K,” is a form to report the amounts of transactions made with payment cards or through third-party networks.
This article will describe the purpose of form 1099-K, why you might receive one, what to do with one, and things you need pay attention if you receive one.
What Is Form 1099-K?
The IRS requires that any person who operates a business, no matter how small, and conducts reportable transactions, to file certain forms to notify the IRS that those transactions were made.
Forms filed for this purpose are called information returns. An individual, partnership, corporation, or other entity that is required to file any type of information return must file one with the IRS and provide a copy to the other party in the transaction.
Form 1099-K is one type of information return. There are many other versions of form 1099 as well. Each type reports a specific category of information. For example, 1099-DIV reports dividends received, 1099-C represents canceled debt, and 1099-NEC reports nonemployee compensation.
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What Does 1099-K Report?
Form 1099-K reports transactions made with payment cards including debit, credit, and stored-value payment cards (Stored-value cards have smart chips. They are often used for things like transit systems or as gift cards). It also reports payments settled by third-party payment networks. Popular examples of third-party payment networks include PayPal, CashApp, and Venmo.
Zelle, another popular payment system, maintains that it is not a third-party settlement organization because it does not hold client funds, but merely serves as a communication link between financial institutions and therefore is not required to send a form 1099-K.
What’s on Form 1099-K?
Form 1099-K includes the value of gross payments received from payment cards or third-party settlement organizations above the required reporting threshold. This includes money received from self-employment, part-time work, independent contracting, or the sale of personal property.
You should receive a separate form 1099-K from each entity required to file one.
What Is the Minimum Reporting Threshold for Form 1099-K?
There is no minimum reporting threshold for payment card transactions. All payments, regardless of number, size, or total amount, must be reported on form 1099-K.
However, there is a minimum reporting threshold for third-party payment network transactions. For reporting years 2023 and after, gross payments for goods and services above $600 must be reported. Payments below this amount do not require a form 1099-K to be filed with the IRS.
Recent Updates to 1099-K Filing Requirements
Form 1099-K was initially created in 2008 with the Housing and Economic Recovery Act.
Prior to 2022, third-party payment networks were only required to report gross payments that exceeded $20,000 or when the total number of transactions exceeded 200.
The American Rescue plan of 2021 reduced the reporting threshold to the current $600 gross limit and removed the 200 transaction threshold.
Going forward, the number of transactions is irrelevant. The IRS initially intended for this new rule to go into effect for 2022. However, on Dec. 23, 2022, the IRS announced that the new rule would be delayed by one year, becoming effective beginning in 2023.
Do You Owe Taxes on the Amount Reported on Your 1099-K?
This has been a significant source of confusion for many people. Amounts reported on 1099-K may be taxable. However, the fact that you receive a 1099-K (or don’t) doesn’t make the amount taxable (or not). The form 1099-K simply reports that a transaction or transactions occurred. The nature of the transaction determines whether or not it is taxable.
The recent changes in reporting requirements concerning Form 1099-K do not affect your tax liability. If income is taxable, you need to report it regardless of whether or not you receive a form 1099-K.
What Should You Do If You Receive an Incorrect Form 1099-K?
If you receive an incorrect Form 1099-K, for instance, if the amount shown is not accurate, you need to contact the company that issued it and ask them to verify the information and provide a corrected copy. You can find the filer’s contact information, including their name, address, and telephone number in the top left corner of the form.
Reasons the form may be incorrect include:
- The incorrect payment amount is shown
- The filer has listed an incorrect merchant category code
- The number of transactions is not accurate
- A wrong Taxpayer Identification Number
- You should not have received the form at all
This is an important step because the IRS will have received the same incorrect information and the issuer is the only one who can correct it.
What If You Receive a 1099-K for Selling Personal Property
Did you know if you sell your used clothing through eBay, PoshMark, or a similar site, you’re required to pay taxes on the amount you earn from your sales?
If you sold personal property and used a payments cart or third-party payment organization and the transaction meets the reporting threshold, you may receive a 1099-K.
How you report the information on your tax return depends on whether you sold the personal property for a gain or a loss.
1099-K for Personal Property Sold at a Loss
The amount should be reported on Schedule 1 of Form 1040 on both line 8z as “other income” and line 24z as an “other adjustment” since personal property sold at a loss isn’t taxable.
1099-K for Personal Property Sold at a Gain
Gains made on the sale of personal property are taxable. This should be reported on Schedule D of Form 1040.
If you receive a 1099-K and the amount shown includes both personal property sold for a gain and at a loss then you must separate the amounts and report each in the appropriate manner as outlined above.
If You Own a Business or Are Self-Employed, Verify the Accuracy of Your 1099-K
Reference your own books and records to ensure that gross payments received match what is being reported on any form 1099-K you receive. You can also check your transaction account records with each payment card or third-party payment organization.
What If the Gross Payment Amount Includes Payments That Don’t Belong to You?
The IRS provides a detailed set of examples on how to handle this situation, depending on the reason the total amount shown doesn’t belong to you. Those examples are summarized below.
You Report Your Business Income on a Different Form
If you report your business income on form 1120, 1120S, or 1065 and receive a 1099-K for business income that is in your personal name, then you need to ask the issuer to correct it by filing a new Form 1099-K issued to your business with the business’s taxpayer identification number rather than you as an individual.
You Share Your Credit Card Terminal With Another Business
If you share your credit card terminal with another business then your 1099-K will include amounts that belong to them.
You should file and provide them with the appropriate 1099 to notify the IRS of payment amounts that belong to them.
You Sold Your Business
A form 1099-K is issued to the taxpayer identification number associated with the credit card terminal on which the transactions occurred.
If you bought or sold a business during the year, the transactions that occurred before the terminal was updated with the new TIN may be reported for the wrong entity.
For example, if you sold your business but the new business conducted transactions before the terminal was updated, you may receive a 1099-K that includes the amount of those transactions.
If this applies to you then contact the issuer as outlined in the section on obtaining a correct 1099-K and notify them of the error.
You’ve Made Changes to Your Business
Changes to your business structure may result in a 1099-K being issued that doesn’t correspond with the new entity’s tax return.
Updating your terminal in a timely manner can help you avoid this situation, but if you do receive a 1099-K for the wrong entity then contact the issuer for an updated one.
Your Customers Receive Cash Back
Payment terminals track the gross amount of transactions. If you allow your customers to receive cash back when they make payment card purchases, that amount will be reflected on your 1099-K.
Since this amount is not taxable to you it is important that your records accurately reflect any “cash back” transactions.
You Use Your Payment Terminal to Receive Payments from Multiple Sources
You may receive multiple sources of income that are reported differently on a tax return, but use one payment terminal to receive the payments.
These amounts will be shown in one aggregate total on your 1099-K, so it is up to you to keep track of the different forms of income in your personal records.
This ensures that you can accurately determine where you should report income on your tax return.
Do You Need Help With Your Form 1099-K?
If you have questions concerning a form 1099-K, refer to the IRS website or talk to a trained tax professional such as a CPA or enrolled agent.