What is a 1099-K form? Who gets one and how to report income for taxes

What is a 1099 form used for?

The 1099-K is an IRS tax form for reporting payment card and third-party network transactions for independent contractors, freelancers, and small businesses.

The IRS uses Form 1099-K to track digital payments through payment cards and third-party payment processors. It helps the IRS validate that all businesses are reporting the correct sales so the government can tax them correctly. 

The form reports business income your company collected using payment card transactions and third-party network transactions. The IRS requires all freelancers, retailers, independent contractors, and other businesses that receive one or more 1099-K forms to report it on their income tax returns. The 1099-K form will come from the company, not the IRS, and each company is responsible for sending one (hence, you may get more than one). 

There are two instances where a vendor will need to send you a Form 1099-K: 

1. If you had more than $5,000 in transactions from: 

• Payment companies like Venmo, PayPal, Cash App, Zelle, or Apple Pay.
• Platforms for self-employed or gig workers, such as eBay, Etsy, Facebook Marketplace, Shopify, Uber, Lyft, Upwork, or Fiverr. 

2. Banks or financial intuitions if you receive any amount via payment cards (such as debit or credit cards). For example, if you use a credit card terminal in your store, you’ll get a 1099-K form from the company that issued you the terminal if you transacted any amount. 

Again, each payment processor or platform is responsible for sending you a Form 1099-K if you did more than $5,000 in business transactions regardless of the number of transactions. So if you sold $5.000 via Venmo and $5,000 on eBay, both companies would send you a 1099-K.

Who gets a 1099-K form?

​​If you're a small business owner or freelancer who accepts payments online or card payments in person, you might receive a 1099-K form. This form is used to report certain payment transactions to the IRS.

Here's when you'll typically receive a 1099-K:

• Third-party payment networks: If you have over $5,000 in payments processed through platforms like PayPal, Venmo, Stripe, or Square or online marketplaces like Etsy and eBay, you'll receive a 1099-K. 
• Credit, debit, and gift card transactions: If you accept credit, debit, or gift card payments—whether in person or online—you'll receive a 1099-K regardless of the amount you process. There's no minimum threshold for card transactions.

Each payment network and card processor you use will send its own 1099-K. So, if you accept payments through multiple platforms or processors, you can expect to receive multiple 1099-K forms.

Who should not get a 1099-K? 

While 1099-Ks are becoming more common, there are certain situations where you shouldn't receive one. Remember, this form is intended for business-related income only.  

Here are some examples of when you should not get a 1099-K:

• Reimbursement from friends or family: If a friend sends you money to cover their portion of a dinner bill, or your roommate pays you back for rent, this is not business income and should not be reported on a 1099-K.  
• Gifts: Money received as a gift from friends or family is not taxable and should not be included on a 1099-K.  
• Personal sales under $5,000 on third-party networks: If you sell a personal item online for less than $5,000 through a platform like eBay or Facebook Marketplace, you generally won't receive a 1099-K. (However, you may need to report this income if you sell the item for a profit.)
• Repaying a personal loan: If someone sends you money to repay a personal loan, this is not considered income and should not trigger a 1099-K.  

If you use a card reader or third-party payment app for both business and personal transactions, it's crucial to keep them separate. Otherwise, you might receive a 1099-K that includes personal payments, which could complicate your tax filing. Consider using a separate account for business transactions to avoid this issue.

Is my 1099-K income taxable? 

Receiving a Form 1099-K doesn't automatically mean that all the reported income is taxable. Whether you owe taxes depends on the nature of the transactions.

Here's a breakdown:

• Business income: If the payments reported on your 1099-K are for goods or services sold as part of your business, this is generally considered taxable income. You'll report this income on your tax return (usually Schedule C) and pay taxes accordingly.
• Personal sales: If you sold personal items online and received a 1099-K, the taxability depends on whether you made a profit. The profit is generally taxable if you sold an item for more than you originally paid for it. However, selling an item for less than you originally paid is generally not taxable.
• Nontaxable income: As we mentioned earlier, reimbursements, gifts, and personal loan repayments are not taxable, and you shouldn’t include them in your taxable income calculations.

Now, let's explore how you can potentially reduce your tax liability on this income.

Deductions for business expenses

If your 1099-K reports business income, you can typically deduct related business expenses to reduce your taxable income. These might include:

• Transaction fees: These are the fees charged by payment processors like PayPal or Stripe or by credit card companies for processing transactions. These fees can add up, so deducting them can make a significant difference.
• Online marketplace fees: If you sell on platforms like Etsy or eBay, you can deduct the fees they charge for listing your products, processing sales, and other services.
• Shipping costs: If you ship goods to customers, you can deduct shipping costs, including postage, packaging materials, and insurance.
• Advertising and marketing: Expenses related to promoting your business, such as online advertising, print ads, or social media marketing, are often deductible.
• Home office expenses: If you have a dedicated space in your home used exclusively for your business, you may be able to deduct a portion of your rent or mortgage, utilities, and other home-related expenses.
• Supplies and materials: The costs of materials used to create your products or provide your services are generally deductible.
• Professional fees: Fees paid to professionals like accountants, lawyers, or consultants for business-related services are often deductible.

Steps for reporting 1099-K income

Reporting and filing Form 1099-K on your tax returns still works the same. It’s very similar to other tax forms you’ll run into as a business owner. You’ll need certain information from this form to complete your overall tax return. 

Below are the four steps for reporting 1099-K income. 

Step 1: Know who’ll send you 1099-K forms 

If you’re like many small business owners, you likely use several forms of payment, from credit cards to Apple Pay and others. It’s your responsibility to keep track of your transactions throughout the year. Using accounting software that links to your bank account can help streamline this task. 

Step 2: Confirm each 1099-K form has the correct information

Closely examine your 1099-K form and ensure that the amounts and information on them are correct. This means checking:

• Your name
• Business name
• Address
• Account number
• Taxpayer identification number
• Gross amount of payments

Failing to be thorough can lead to paying incorrect taxes. For example, if you miss reporting your gross payment amount and transfer this incorrectly onto your tax return, you’ll likely pay the incorrect amount of taxes. 

Here is an example of what a completed 1099-K might look like: 

Step 3. Check for tax deductions

Businesses that incur credit card processing fees or credit card company charges are eligible for a tax deduction for those expenses. However, it is up to you to track your expenses, charges, and fees during the year so you can write them off. 

Step 4: Prepare your Schedule C

Schedule C (Form 1040) is an IRS form that shows the income or loss your business incurred during the year. Since a 1099-K form reports payments you received via a third-party payment platform or app, you'll include that information on your Schedule C form as part of your tax return. 

Once you’ve checked that your 1099-K form shows the correct amounts and information, the next part is to fill in the 1099-K gross payment amounts and fees into your Schedule C form. 

Find peace of mind come tax time

Whether this is your first go-round with a Form 1099-K or your tenth, there are things you can do to ensure you’re ready for tax season. This includes leveraging experienced bookkeepers to assess your accounting books and help with all your 1099 forms.

With live bookkeeping services like QuickBooks Live, you can also ask questions about income tax returns, refunds, and tax forms like Form 1099-MISC and Form 1099-K.

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