Call yourself a freelancer, part-time Uber driver, online advertiser, Airbnb host, full-stack and backend remote blah blah; Congrats and either way you are now a business owner and are responsible (among many other things) for paying taxes.
And, IRS loves this 😋☕
If you have been selling products or services online, there’s a good chance you will now receive a 1099-K form from your payment processor. This allows the IRS to verify what you were paid, is actually what you said you got in your tax filing.
This tax form can be confusing to understand, so we’re going to explain everything you need to know about it in this post. Keep reading for more information and to understand your obligations!
What is a 1099-K form?
A 1099-K form is a tax form that is used to report payments made to you for the sale of goods or services (transactions) made in a calendar tax year. The form is issued by your third-party payment processor or payment settlement entity (PSE), such as PayPal or Stripe, Etsy Venmo, etc.
It will show the total amount of money that was paid to you over the course of the year. This includes any fees that were charged for the transaction.
After the 2008 mortgage crisis, the US Congress passed the Housing Assistance Tax Act of 2008. Part of this act included the creation of Form 1099-K to help the IRS track payments made through credit card processors and third-party settlement organizations.
Forms were first due to be filed in 2011, but the IRS delayed implementation until 2013. In 2014, the agency began issuing penalties to businesses that failed to file the form correctly.
The recent ARPA bill also included provisions to decrease the aggregate reporting threshold to $600 starting in 2022, from the prior $20,000 limit. They also removed the minimum transaction limit for reporting.
This meant a lot more smaller business owners would now be getting these forms and require them for their IRS tax filings.
The major idea behind the 1099-K form and adjustments was to help the IRS track income from online transactions. Being in a digital century meant more business and more job opportunities for people all around the world with just a click of the computer.
But it also meant that the IRS was losing out on a lot of potential tax revenue. They needed a way to track these transactions in order to collect the taxes owed.
This avenue would allow them to better collect taxes on this income. Prior to this, there was no easy way for the IRS to track this income, so many people were not paying taxes on it.
If you receive income from online transactions, you will likely receive the 1099-K form from your payment processor. This form is used to report income from online sales. It will show the total amount of money that was paid to you over the course of the year, including any fees that were charged for the transaction.
Form 1099-K Versus Other 1099 Forms
Don’t get confused, as there are many other versions of the good old trusty 1099s. The most common being the form 1099 MISC, used to report miscellaneous income.
But what separates the 1099-K from the 1099-MISC is that credit card firms and third-party processors utilize Form 1099-K to report payment transactions they accept and process for merchants or other third parties.
Form 1099-MISC on the other hand is typically used to report payments made to independent contractors directly. For example, if you sell goods or services online, you will receive a Form from your payment processor.
This form is used to report income from online sales. It will show the total amount of money that was paid to you over the course of the year, including any fees that were charged for the transaction.
But if you are an independent contractor who provides services to a company, you will receive a form from that company. This form is used to report income from services provided. It will show the total amount of money that was paid to you over the course of the year, including any fees that were charged for the transaction.
Now that we’ve explained what this form is, you might be wondering how it differs from other forms in the series. After all, there are quite a few of them!
Here’s a quick rundown of some of the most common forms in the series:
- Form 1099-INT : This form is used to report interest income
- Form 1099-DIV: This form is used to report dividends and capital gains
- Form 1099-MISC: This form is used to report self-employment income
As you can see, the form is specific to online sales transactions. So if you receive income from other sources, you will likely receive a different form.
Who needs to file Form 1099-K with their tax return?
If you are a business owner who accepts/receives payments through a third-party payment processor, such as PayPal or Stripe, then you will need to file this form other than a 1990-MISC. This includes businesses of all sizes, from sole proprietorships to large corporations.
Also because the reporting thresholds were changed, many more folks will be seeing this form. Below are the changes:
- For tax returns for calendar years prior to 2022, 1099-K’s were required if:
- Gross payments that exceed $20,000, AND
- More than 200 such transactions
- For returns for calendar years after 2022, 1099-K is need when:
- Gross payments exceed $600, AND
- Any number of transactions
The form is also used to report income from online sales. So if you sell products or services online, you will likely need to file a 1099-K form.
However, there are some exceptions. For example, if you are a real estate professional or attorney who receives income through a third-party settlement organization, you are not required to file a Form for that income.
How can I file a 1099-K Form?
If you need to file a Form, you can do so online via your tax software or by mail.
To file online (recommended), you will need to create an account with the IRS e-Services portal. Once you have created an account, you will be able to access the online filing system.
When is the 1099-K Form due?
The form is due to be filed by January 31st of the year following the tax year. So if you receive income in 2020, you will need to file the form by January 31st, 2021.
Tips on filling my 1099-K form
Here are a few tips to help you fill out your form :
Make sure you have the correct tax year
The form should be for the tax year in which the income was earned. Enter the total amount of income you received. This should be the total amount of money that was paid to you, including any fees charged for the transaction.
Include all of your information
This includes your name, address, and Social Security number or Taxpayer Identification Number. Ensure that this information is accurate and up-to-date.
Double Checking, not Double Reporting!
Double-checking your tax is just the same as attempting your math questions-you don’t want mistakes.
This is important! You don’t want to make any mistakes on your form that could lead to penalties or interest. And please, in all your doings, don’t ever try to double report your income.
For instance, if you receive a W- from your employer, normally, this is supposed to be reported in the 1099-NEC form. But if your employer pays you through third-party apps like Venmo, cash app, PayPal etc, don’t report that same income on your tax return, rather on the 1099-K form.
You can do this easily and it’s the best way to ensure accuracy and avoid any penalties.
How do I know if I filled an incorrect 1099-K form?
Whilst it’s important that you take due diligence whilst filing your form, don’t worry if you make a mistake- we all do!
The IRS will contact you if they think something is off with your form. it may be because;
- Your business is not accurately described by the Merchant Category Code (MCC).
- The total number of payment card and third-party network transactions is inaccurate.
- The Form 1099-K does not belong to you or is a duplicate of another Form 1099-K.
- The Taxpayer Identification Number (TIN) of the payee is incorrect.
- The payment transaction count is wrong.
What to do if I receive an incorrect Form
If you believe that the information on your form is incorrect, you should contact the payer (known as the payment settlement entity) to inquire about the basis of this document and ask them to correct the form.
The name and phone number should appear in the form’s lower-left corner. If a PSE name and number are not displayed, please contact the Filer at the number indicated in the upper-left corner of the form. Any correspondence with the PSE should be kept.
If they are unable to do so, you can file a corrected return by attaching a statement to your tax return.
The bottom line
This form is an important tax document, and it’s one that all business owners should be familiar with. If you receive income through a third-party payment processor, such as PayPal or Stripe, then you will need to file this form.
The form is also used to report income from online sales. So if you sell products or services online, you will likely need to file a Form.
However, there are some exceptions. Cash or transfers made for fiduciary purposes are excluded from this list. For instance, if you were gifted more than $600 for that channel bag you wanted for your birthday wishlist, it definitely won’t be counted as a taxable event.
The same goes for alimony payments, life insurance proceeds, and certain annuity payments. So if you’re ever in doubt about whether or not a cash transfer is taxable, ask the gifter for clarification or consult a tax professional.
If you need to file a Form, you can do so online or by mail. The form is due to be filed by January 31st of the year following the tax year.
And that’s everything you need to know about the Form! If you have any questions, be sure to contact the IRS for help.