With the requirements to get a 1099-K Form changing to receiving $600 or more in payments, there’s a much greater chance that you’ll have your payment transactions reported to the IRS. Does this mean you have to report those payments on your tax return? If so, what deductions can you take?
What is Form 1099-K?
Form 1099-K is a relatively new IRS form that reports payment card and third-party network transactions. Payment card transactions are payments using debit cards or credit cards. A third-party payment network is a service like Square or QuickBooks Payments that a company or sole proprietor uses to collect their payments.
Form 1099-K tells the IRS how much money you received through a payment service. You get this tax document from the payment service rather than your clients.
What are the Tax Form 1099-K reporting requirements?
Starting with the 2022 tax year, you will receive a 1099-K if you have more than $600 in third-party payment network transactions through a single payment settlement entity.
Up through the 2021 tax year, you would get a 1099-K if you received gross payments totaling $20,000 or more AND had more than 200 transactions during the year.
The Form 1099-NEC IRS instructions (previously Form 1099-MISC) say that a business that pays its vendors through a payment settlement entity that reports on 1099-K should not issue a 1099-NEC. This avoids double reporting of income.
Does getting a 1099-K mean you have taxable income?
A 1099-K does not mean that income is taxable. For example, you might receive a peer payment paying you back for dinner. You might take credit card payments at a garage sale where you sold your personal items for less than you paid for them. These are not taxable events.
The purpose of 1099-K is to make sure people include business income on their federal returns. Previously, people who received less than $600 from each client or whose clients were bad at sending Form 1099-NEC when required had a much easier time not reporting all of their income on their tax return.
What tax deductions can you take for Form 1099-K payments?
The deductions you can take depend on what type of payments are reported on 1099-K.
What deductions can you take for personal payments reported on Form 1099-K?
If you receive personal payments, like gifts or reimbursements from family members, do not report these amounts on your income tax return. Since these payments aren’t taxable income, you can’t take any deductions.
Keep records of the purpose of the individual payments to prove that these were not taxable if the IRS audits you.
What deductions can you take for hobby payments reported on Form 1099-K?
Under the tax rules for hobbies, you do need to report hobby income as other income on your tax return. However, you are not allowed to take deductions for hobby expenses.
What deductions can you take for payments for items you sold reported on Form 1099-K?
If you sell items, such as collectibles, at a profit, you will typically need to pay capital gains taxes. The capital gains rates apply to the difference in your purchase and selling price. The tax form you need to use is Capital Gains and Losses, Schedule D. There are separate lines to enter what you originally paid for the item, what you paid for it, and your net gain or loss.
What deductions can you take for business payments reported on Form 1099-K?
A Form 1099-K from a third-party payment processor reports your gross income. You need to report your total gross income on your Schedule C, but you only get taxed on your net profit.
Note: If a Form 1099-K has a mix of business, personal, and hobby payments, do not report the total amount on your Schedule C. Report only the business portion on Schedule C, report the hobby portion as other income, and leave the personal portion out.
To arrive at your taxable net profit, you can deduct your ordinary and necessary business expenses. These can include the following:
- Business mileage deduction provided that you have a mileage log
- Payment processing fees
- Costs of inventory if you sell items
- Advertising costs
- Software subscriptions
- Hired services
- Other industry-specific deductions
You can learn more about the deductions for common independent contractor jobs that may receive a Form 1099-K in the following tax guides.
What do you need to do to claim your deductions?
As with other tax deductions, you need to keep good records of your transactions. You need to be able to prove the amount and purpose of all deductions that you take. Save all of your receipts and add notes in your bookkeeping software if the purpose of a transaction may not be clear.
As a self-employed worker, you are already at a higher risk of an audit. The 1099-K Form also creates additional chances to be audited since it can include both taxable and non-taxable types of income. However, if you follow the rules by claiming only legitimate deductions and keeping good records, you shouldn’t have much trouble getting the IRS to agree that your federal returns were correct as you filed them.
Form 1099-K can include several different types of income that may or may not be taxable. What tax deductions you can take depends on what type of income it is. Review the tax rules for your specific situation and consult with a tax advisor if needed.