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 when you earn income from one or more of your gigs.
[2023 Tax Season Update] The IRS has announced that they will be delaying the introduction of the new $600 reporting threshold for 1099-K forms. This was to be introduced this tax season.
This means the existing $20,000 and 200 transactions thresholds will remain in place through the current tax season (December 31, 2023).
And, the government and IRS loves this! In fact for 2022, based on legislation Congress passed, the minimum threshold for third-party payment processors to report this has dropped considerably to $600 (from $20,000!). So a lot more folks are going to be seeing this form when it comes to filing their taxes in the 2022-2023 tax season.
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 (think Paypal, Venmo) who likely facilitates payments between you and your customers. This allows the IRS to verify what you were paid, is actually what you said you got in your tax filing.
The 1099-K 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!
2023 1099-K Reporting and Filing Issues
While the intent of the 1099-K is to track business related expenses and transactions, it is likely going to go out to a lot more individuals and business taxpayers in 2023 due to the lower thresholds. It will likely even go-out incorrectly to people who shouldn’t be getting this as they have qualifying business expenses.
The IRS in fact cautioned people to wait until the end of January (when the 1099K forms need to be sent out) before filing returns to make sure they have all of their key income documents before submitting their tax return.
Also if the information is incorrect on the 1099-K or received erroneously, taxpayers should contact the third-party processor immediately to resolve the issue. Their details should be on the 1099-K form. The IRS cannot correct it.
Fortunately Congress is also realizing this issue and both Democrats and Republicans have introduced bills to try and reinstate higher reporting thresholds for 1099-K forms. Just be prepared to deal with this if these bills don’t pass.
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) in a calendar 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.
Reasons and Tracking Business Expenses
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 Will I Get My 1099-K Form?
The form is due to be filed and sent out by third-payment processors to tax filers by January 31st in the year following the tax year the expense was incurred.
So if you receive income in 2022, you will receive the form by January 31st, 2022. Or said another way, third party payment processors will need to send out 1099-K forms by the end of January 2022.
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.