If you’re self-employed or an independent contractor, you probably already know your tax situation is a bit more complicated than the average person. You fill all the shoes in your business, from accountant to HR manager. Sure, you get the freedom of self-employment. But there’s no doubt it comes with some extra responsibilities.
As a self-employed person, you’re responsible for making your own estimated tax payments, are on the hook for self-employment taxes, and receive tax forms your traditionally employed friends don’t.
One of the tax forms you may receive is IRS Form 1099-K. You’ll probably run into this form if you accept online payments through third-party payment platforms, which is more common than ever today. And when tax season rolls around, it’s important you know what to do with it to avoid trouble with the IRS.
What Is IRS Tax Form 1099-K?
IRS Form 1099-K is a tax form payment platforms like Venmo and PayPal send you to report noncash customer payments you’ve used their platform to receive.
As with other informational tax forms, you must report the income on your 1099-K and pay taxes on the payments when you file your federal tax returns.
Who Should Receive a Form 1099-K?
You should receive one 1099-K form by Jan. 31 of the year following the transaction from each payment network you used to receive reportable payment transactions. A reportable payment transaction is:
- A Payment Card Transaction: Any payment method that looks like it might be a payment card, such as a credit card, debit card, or stored-value card (like a prepaid Visa card)
- Third-Party Network Transaction: Any transaction after you exceed $600 (for 2022 and later) in sales in which a third party guarantees the settlement of payment, even if the person receiving funds never sees the payee’s account information, such as Venmo transfers or an online shop run by a third-party payment network like Stripe
Note that if you’re doing your taxes for the tax year 2021 or earlier, you only receive a Form 1099-K from third-party networks if you had more than 200 third-party network transactions and gross payments of more than $20,000.
When the income threshold changed from $20,000 to $600, many individuals feared their Venmo and PayPal transactions between friends and family would be subject to income taxes. But because it’s a personal transaction, none of you has to worry about any tax consequences for sending the money.
For example, let’s say you and some friends go in on a birthday gift for another friend. One of you buys the gift, while the rest reimburse them for their share. How exactly does Venmo or PayPal know whether your transactions are personal or business-related?
It’s pretty simple: You tell them. First, both Venmo and PayPal allow you to create a business profile rather than a personal one, which is what you’ll use to accept online payments if you’re self-employed. Additionally, both platforms allow you to separately tag transactions on your personal account as being for goods and services. So if you have to use your personal account to accept payment from your work, you can do so without fearing any repercussions from the IRS.
You’ll only receive a 1099-K form if you have self-employment or independent contractor income that exceeds that $600 threshold.
Crucially, it’s technically possible to have income reported on both a freelance client’s 1099-MISC and your payment processor’s 1099-K. You’re still only responsible for paying taxes on that income once, preferably using the amount listed on the 1099-K, which shows the income minus your processing fees. That’s why it’s important to keep accurate business income and expense records throughout the year.
Conversely, you may not receive a 1099-K form if a freelance client paid you via one of these payment networks. If a company pays its contractors through PayPal, they aren’t required to send a 1099.
If you have any questions about what qualifies as reportable income or what to do about duplicate reported income, reach out to your accountant.
Understanding the IRS Form 1099-K Boxes
If you’ve received IRS Form 1099-K, it’s essential to understand how to read it if you have to report its contents to the IRS. When you receive your 1099-K, it will show:
Information About the Filer & Payee
First, your 1099-K form will have several boxes that include information about you (the payee) and the company providing the form (the filer). The form requires both parties’ name, address, and tax identification number.
The form includes a space for an account number, which the filer can include to distinguish your account. That way, if you have multiple accounts with different account numbers or tax identification numbers, you can receive and distinguish multiple 1099-Ks.
The form requires information about the transaction types. First, the filer indicates whether it’s a payment settlement entity (PSE), an electronic payment facilitator (EPF), or another third party. Additionally, there’s a box where the filer indicates whether the transactions were payment card or third-party network transactions.
Information About Your Income
In the next section of the form, you’ll find boxes labeled with numbers and letters (Box 1a through Box 8), which are where the filer reports information about the amount of income you received, when you received it, and what taxes it withheld if any.
- Box 1a: This box lists the gross amount of payment card or third-party network transactions for the year. If you had both payment card and third-party network transactions, the combined amount appears here.
- Box 1b: This box contains the gross amount of payment transactions during which the card wasn’t present at the time of the transaction. In other words, if you or an employee entered card numbers on a keypad instead of swiping the card, the filer records that info here. This information is included in the total in Box 1a, so you don’t need to report it as additional income. If you do in-person transactions during which the customer swipes a card, the number may be different from what appears in Box 1a. But if you run a solely online business, the two numbers are likely the same.
- Box 2: If there is a category code for your payment card or third-party network transactions, it may appear in this box. It isn’t relevant for tax purposes, and it may even be blank, and that’s OK. Credit card companies and payment networks use these codes to categorize transactions.
- Box 3: This box will show the total number of payment card and third-party network transactions minus those you refunded. The number might be helpful for business purposes since you can see your total number of sales. But it’s no longer relevant for tax purposes.
- Box 4: If you didn’t provide your tax identification number or are subject to backup withholding, the payment network may have withheld federal income taxes from your transactions. If that’s the case, the amount withheld appears in this box and represents money you’ve already paid the IRS. For most taxpayers, this box will be blank.
- Boxes 5a Through 5l: IRS Form 1099-K includes 12 boxes where the filer reports your gross monthly income. The total of these 12 boxes should equal the gross transaction amount that appears in Box 1a. These amounts can be useful in helping you ensure your records match those the payment network has provided.
- Box 6 and 7: Because you may also owe state and local taxes on your payment transactions (depending on where you live), the form includes your state and the state identification number.
- Box 8: If a payment network withheld any state taxes, the total amount appears here.
While the 1099-K breaks down your income by month, the most important figure is the one in Box 1, which is your gross transactions for the year. You should also pay close attention to the numbers in Boxes 4 and 5 since they show how much money the filer withheld for federal and state taxes, respectively.
If the payment platform didn’t withhold any taxes on your behalf (which is likely the case), then you’re on the hook for taxes for the entire amount, though you should have been making estimated tax payments yourself, which hopefully cover the amount you owe. It’s not all bad news, though — you can offset your gross income with deductions for business expenses you incurred throughout the year.
Form 1099-K FAQs
Do you still have questions about Form 1099-K and how it relates to your individual income taxes? These frequently asked questions can help you get up to speed.
What Is the 1099-K Threshold?
Starting in 2022, the threshold to receive a 1099-K is $600 with any number of transactions. For any tax year before 2022, the threshold was $20,000 and 200 transactions. It’s worth noting that the threshold is only to receive a Form 1099-K. Not receiving a form doesn’t mean you don’t owe taxes. Even if you earned less than $600 from a specific payment app or platform, you’d still have to report that income on your tax return.
What’s the Difference Between a 1099-K, 1099-MISC, and 1099-NEC?
There are several types of 1099 forms, known as informational forms, meaning you get them for informational purposes. Each reports a different type of income. For example, IRS Forms 1099-K, 1099-MISC, and 1099-NEC report different kinds of self-employment income.
Form 1099-MISC reports a wide variety of income types, including rent, prizes, medical payments, and crop insurance proceeds (literally miscellaneous income that doesn’t fit into another category).
Form 1099-NEC — short for nonemployee compensation — reports income from other businesses for services performed. You receive this form if you provide more than $600 worth of services to a company as a freelancer or independent contractor.
How Do I Correct Information on a 1099-K?
If there’s an error on your 1099-K, it’s crucial you work to resolve it. Remember, the IRS also receives a copy. If you report an income amount that’s different from what appears on the form, it’s likely to raise some red flags with the IRS.
If you find an error, contact the payment platform that sent the document to request a corrected 1099-K form. Keep the original 1099-K form along with any communications between you and the payment platform. The more thorough your records, the better you can respond to any problems that arise, such as if the payment network fails to provide you with an updated form.
What Do I Do With Form 1099-K?
You don’t have to file Form 1099-K. It’s a form you receive. The company that provided you with the form files a copy with the IRS, and you report that income on your tax return.
If you fail to report income on your tax return — and therefore, don’t pay taxes on it — you’re on the hook for the penalties. First, the IRS sends you a notice to pay the unpaid taxes within 21 days. But if you don’t pay the tax by the due date, it charges you a failure-to-pay penalty of 0.5% per month. And don’t expect to get away without paying since the IRS receives a copy too.
Receiving self-employment income often means ending up with more tax forms in your mailbox than your otherwise employed peers. Because of recent changes in the thresholds for receiving Form 1099-K, you may receive one this year, even if you didn’t in previous years. The good news is the new threshold doesn’t mean you owe more taxes.
But it’s essential to report that income on your tax return correctly, either way. Tax prep software or a tax professional can guide you through the process to ensure you’re reporting and paying everything you should be.