Starting with the 2023 tax year, more business owners and individuals may receive copies of IRS Form 1099-K reporting transactions to the IRS. This isn’t a new form, but starting with tax year 2022, a lot more of them are expected to be issued, and may create a lot of confusion and headaches at tax time.
Here’s what you need to know about the 1099-K tax form and your small business.
What Is the IRS 1099-K Form
Freelancers, independent contractors and business owners are often familiar with 1099 forms in general. When you earn more than $600 in a year for services as a freelancer or contractor, the company that paid you is supposed to file a 1099 form with the IRS, and send you a copy. The two most common forms used for these kinds of payments are:
- 1099-MISC (miscellaneous income including prizes and awards)
- 1099-NEC (nonemployment compensation)
It’s also possible, but less likely, that you’ve received a copy of a 1099-K. If you haven’t received one in the past, that may change for tax year 2022.
Form 1099-K, Payment Card and Third-Party Network Transactions, is designed to capture certain payment transactions that may not get reported to the IRS. The goal is to “increase voluntary compliance with tax requirements,” which also happens to make it harder for individuals or businesses to avoid paying taxes on certain types of transactions.
This form reports credit or debit card transactions received by a business. It also reports certain payments from payment networks like PayPal, Zelle, Cash App or Venmo. Those organizations are required to file a 1099-K with the IRS if an individual or business had transactions totalling more than $20,000 in the year, and more than 200 such transactions.
The American Rescue Plan dropped the threshold to $600 in payments in a year, with no limit on the number of transactions. That means one transaction for more than $600 can trigger this form.
If you are due a 1099-K, you should receive it by January 31st for the previous year’s transactions. (January 31, 2023 would be the deadline for 2022 transactions, for example.)
It’s also worth noting that several states—Maryland, Massachusetts, Mississippi, Vermont and Virginia, and the District of Columbia—already use the lower $600 limit. Arkansas has a threshold of $2500 while Illinois and New Jersey both have a $1000 threshold (IL also requires 4 or more transactions.)
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Types of Transactions Reported on 1099-K
Form 1099-K reports the gross amount of all payment transactions, whether those are for your business, transactions as someone who is self-employed, or even transactions when you sell personal items on marketplaces that are required to file 1099-Ks.
- Payment card transaction means any transaction in which a payment card, or any account number or other identifying data associated with a payment card, is accepted as payment.
- Third party network transaction means any transaction that is settled through a third-party payment network, but only after the total amount of such transactions exceeds the minimum reporting thresholds. A third party network transaction may include a payment through a payment app.
Let’s say you own a lawn care business and your customer pays you through Venmo. If your total transactions for the year totaled $600 or more, regardless of the number of transactions, Venmo will be required to file a 1099-K with the IRS reporting your transactions.
What some people might consider personal transactions can fall into reportable territory. For example, if you sell personal items on eBay or another marketplace the IRS considers those reportable transactions, even if you didn’t make money. You can then report it on your taxes as a loss.
It’s also worth noting that your purchases do not trigger a 1099-K; payments do. In other words, simply using a business credit card to pay for business expenses doesn’t mean you’ll get (or have to file) a 1099-K form. But if your business accepts credit or debit cards and your customers use them to make purchases from you, that will trigger a 1099-K from your payment processor or merchant bank. (The IRS refers to these organizations as payment settlement entities or PSEs. They help your business accept credit and debit card payments directly.) There is no threshold for this type of reporting.
How To Manage 1099-K Transactions
If you are using accounting software and have a good bookkeeping process in place, and you report all your income, this should have a good bookkeeping process in place and keep track of all your business income and expenses.
If you use sites like ebay, Venmo, Zelle, CashApp or PayPal, whether personally or professionally, make sure you properly categorize your transactions, and that people who send you money do the same.
Otherwise you could receive a 1099-K that includes transactions that don’t qualify, such as getting reimbursed after splitting a restaurant bill with a friend.
Cash App’s states states: “Form 1099-K is used to report transactions for the sale of goods and/or services made to Cash for Business accounts. If you have a personal Cash App account, you will not receive a Form 1099-K from Cash App, and Cash App will not report any of your personal transactions to the IRS.”
Venmo states: “This requirement (1099-K) only pertains to payments received for sales of goods and services and DOES NOT apply to friends and family payments. When sending money on Venmo, users can choose to tag a payment as being for “goods and services”. Whether it’s for a product you sell, a service you provide, or even an old couch you don’t want anymore, the person paying for the item or service can decide whether to tag the payment. All payments sent to business profiles on Venmo are tagged as purchases automatically and are therefore considered to be for goods and services.”
PayPal states: “This new Threshold Change (for 1099-K reporting) is only for payments received for goods and services transactions, so this doesn’t include things like paying your family or friends back using PayPal for dinner, gifts, shared trips, etc. PayPal tax reporting is required when the sender identifies the product as goods and services to the IRS, even if it was a mistake. This requirement applies once you receive $600 USD or more from this type of payment. Both PayPal and Venmo offer a way for customers to tag their peer-to-peer (P2P) transactions as either personal/friends and family or goods and services by choosing the appropriate category for each transaction.”
eBay states: “If you haven’t already given us your 9-digit Social Security number (SSN) or Individual Tax Identification Number (ITIN), we’ll ask you to provide it once you reach $600 in sales. If you don’t provide your 9-digit TIN, your payouts will be put on hold and we may deduct backup withholding from future payouts.”
Etsy states: Along with other information, Etsy states, “If you run multiple shops, the sales across all your shops will be combined based on your SSN/EIN number. If the sales across your shops total more than either the federal threshold or a state threshold, you’ll receive a single 1099-K form for your combined gross income from all your shops.”
For everything you sell online, it’s recommended you keep a record of each transaction, including the original cost of the item and any selling related expenses. Keeping track of your expenses will help you determine the cost basis of each item you sell and will come in handy when you do your taxes.
1099-K Best Practices
In summary, there are three best practices for small business owners and individuals when it comes to using these apps:
- Use a business version of the app for business transactions and the personal version for personal transactions. This same advice applies to freelancers or business owners when it comes to using a business bank account versus a personal account, or a business credit card versus a personal credit card. Keep business and personal separate.
- Be sure to properly categorize personal transactions, and keep records of anything you sell personally on these apps. If you’re cleaning out your closet or garage and selling items online, for example, you’ll want to keep records of what you’ve paid for those items you sold so you can either identify how much you made (and pay taxes accordingly) or how much of a loss you took. (You can’t deduct losses on the sale of personal items, unfortunately, but at least you won’t owe taxes.)
- Provide your business tax identification number (usually an Employer Identification Number or EIN) for your business account to avoid backup withholding, and to make sure business transactions aren’t reported as personal transactions. If you don’t already have one, here’s how to get an EIN for free. It’s quick and easy to do so. Consider forming a business entity like an LLC or corporation to clearly separate your business and personal finances.
Note that the gross payments reported won’t include fees, adjustments. You’ll need to keep your own detailed records of fees, sales taxes, refunds and other amounts that can lower the gross amount to ensure you don’t pay more taxes than necessary. Again your bookkeeping software, or a professional bookkeeper, can be a huge help here.
How Form 1099-K Relates To Small Businesses
If you accept credit or debit card payments in your business, nothing will change there. If you’ve been using apps like CashApp or Venmo to accept payments for your business, you may get a 1099-K when you didn’t in the past. If you already report your business income, regardless of whether you receive a copy of this form, then not much should change. You’ll just have to review each form carefully to make sure it is accurate.
One hiccup you may run into is personal transactions that are mingled with personal transactions reported on 1099-K. If you’re running all your transactions through your personal Social Security number, then personal and business transactions will be reported together.
This is another incentive to form a business entity and use the business account version of these platforms so you don’t mix business and personal transactions at tax time.
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How To Review a 1099-K Form
Here’s what a 1099-K Form looks like. It is an informational return, which means it just reports information. The company that files the 1099-K must send this form to the IRS, and a copy to the recipient.
A few things to look for on the 1099-L:
Make sure the Payee’s name (that’s you – the individual or business who receives the form) is correct and that you have provided an up-to-date address so you receive a mailed copy. You should also be able to access a copy online through your payment app account if you can’t find the mailed copy.
Check the Payee’s TIN – this refers to the taxpayer identification number, either your Social Security number or an employer identification number you’ve provided. Make sure it’s correct.
Check the amounts reported and make sure they are correct. Again, if you’ve been keeping up with your bookkeeping it should be fairly easy to reconcile this against your own records of sales. Just remember, this form reports gross sales, not sales minus fees or credits.
Reporting Form 1099-K Income on Your Taxes
You won’t find a specific place on your income tax returns for reporting 1099-K transactions. Instead, you include them in your income, depending on the type of income.
For example, if they are business income and you file Schedule C to report business taxes, you’ll report it on your 1040 Schedule C. If you have formed an LLC or corporation (including an S Corp) you may include this income in your tax form 1040 Schedule C, or for corporations or businesses electing to be taxed as a corporation, 1120 or 1120-S, or for partnerships, Form 1065.
If you have transactions that do not relate to your business for which you receive a 1099-K you’ll need to include those with your personal return, which usually means Form 1040.
Common Issues With 1099-K Forms and How To Address Them
The biggest issue with these forms is likely the confusion they will cause for individuals and business owners who didn’t receive them in the past, and who have not kept up with their bookkeeping.
If you receive a 1099-K that is not correct, you can contact the company that filed it and ask them to correct it. (An example would be if it included transactions that were not business transactions on a 1099-K for your business account, or it included personal transactions like getting reimbursed after splitting a meal with a friend).
Business owners have (hopefully) kept good records of business income and expenses, and in those cases, these forms shouldn’t cause a lot of problems.
But if you have not separated your business and personal transactions on these apps, or if you have mischaracterized these transactions, you could run into problems at tax time.
Your tax professional can help with issues you run into, and the IRS has published a set of FAQs about 1099-K transactions where you may find answers your questions.
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Nav’s Verdict: Form 1099-K
Freelancers, independent contractors and business owners who manage their business well by separating business and personal transactions, and staying up to date on their bookkeeping with accounting software should have nothing to fear from these forms.
But for those who have been running a business on the side and hoping the IRS doesn’t find out, these new 1099-K reporting requirements should be a wake-up call to set up those processes so they don’t wind up with a big tax bill and potentially expensive penalties from the IRS or their state taxing authority.
Frequently Asked Questions About 1099-Ks
Is a 1099-K Required for $600?
Yes, for tax year 2022, 1099-K forms will be required for certain transactions totaling $600 or more over the year. Even a single transaction for that amount may trigger one of these forms, but multiple transactions that add up to this amount could do so as well. Personal transactions, such as reimbursing a friend for something she paid for, should not trigger a 1099-K. Be sure you and the people who send you money categorize these transactions properly when using these apps to avoid problems.
Will I Get a 1099-K for a Side Hustle?
You may. Let’s say you have a side business selling your baked goods at a farmers market. If you accept debit and credit card payments for your baked goods, you will receive a Form 1099-K for the gross amount of the payments made to you through the use of a payment card during the calendar year. This reporting requirement has not changed, and there is no minimum reporting threshold for these payments to trigger a reporting requirement.
But let’s say you simply operate as a sole proprietor and you receive payment for your baked goods by cash or via Zelle, Cash App, PayPal or similar payment apps, and you have more than $600 in sales categorized as business transactions or for the sales of goods or services, you should receive a 1099-K reporting those amounts.
Keep in mind that income from a side hustle or freelance work may require you to pay quarterly estimated self employment taxes. There are penalties for underpayment.
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