IRS Form 1099-K

Form 1099-K reports payment transactions you receive from a payment settlement entity. It includes gross receipts that may or may not be reportable on your income tax return. You may also be able to take deductions to offset any business income you have to declare.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

What is a 1099-K used for?

IRS Form 1099-K 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, PayPal, or QuickBooks Payments that a company or sole proprietor uses to collect their payments.

Form 1099-K tells the IRS how much total money you received through third-party settlement organizations. It does not necessarily report business income.

What are the tax form 1099-K issuing 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.

There is no longer a minimum number of payment transactions to receive a 1099-K. If you have a single transaction that’s $600 or more, you could get a 1099-K.

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 reportable payment transactions during the year.

It was very easy for someone to have $200,000 in gross payments but only 199 third-party network transactions and leave the income off of his income tax return. The IRS lowered the requirements for a third-party payment network to report payments to reduce potential tax evasion.

What is the deadline for Form 1099-K?

The usual deadline to receive Form 1099-K is January 31st. Third-party payment settlement entities have a few extra weeks to send the forms to the IRS.

You may receive your 1099-K online or by mail. If you receive it by mail, it has to be postmarked by January 31st, so you could receive it a few days later.

Who issues Form 1099-K?

Third-party network transactions are reported by the third-party payment processor. The business making the payments does not report this income to the IRS.

The Form 1099-NEC (previously Form 1099-MISCIRS instructions clearly say that a business that pays its vendors through a payment settlement entity that reports on 1099-K should not issue a 1099-NEC. Despite this, some tax professionals are fraudulently pressuring clients into issuing 1099-NECs when they shouldn’t to increase their tax preparation fees.

Does getting a 1099-K mean you have taxable income?

Getting a 1099-K does not mean that your payment transactions are taxable. You may receive a 1099-K if your non-business payments exceed the minimum reporting thresholds.

For example, you might receive a 1099-K for a peer payment paying you back for dinner or taking 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.

Your reportable payment transactions could also have been hobby income instead of business income.

The purpose of 1099-K is to help the IRS find business income from payers who traditionally didn’t have to issue a 1099-NEC or were bad at following the requirements. Since the payment processor doesn’t always know what payment card transactions are for, non-taxable payments can end up on a 1099-K.

What is the minimum amount to report a 1099-K?

Once you hit the $600 minimum reporting threshold to receive a 1099-K, the minimum amount to file an income tax return depends on what type of income was on your 1099-K.

For business income, you must file a tax return if you have at least $400 in net business income or have another reason you’re required to file. If you’re required to file, include every dollar of your business income.

For hobby income, you must report every dollar of income as other income if you’re required to file a tax return. You may have to file based on your business income, having total income greater than the standard deduction, or for other reasons.

For non-taxable income, you do not need to report it on your income tax return no matter how much you received.

What happens if I don’t report 1099-K income?

If you don’t report 1099-K income at all or have a lot of business deductions so your reported profit is much lower than your gross receipts, you could get a letter from the IRS.

Be prepared to show 1) proof of what the payments were for and 2) proof of the deductions you claimed.

This means you may need to keep records and receipts of non-business third-party network transactions. Some networks don’t report personal payments on 1099-K, so if you have a lot of personal transactions, you may want to move to one of those payment services.

It’s also a good idea not to make both business and personal third-party network transactions in the same account.

How much taxes do you pay on a 1099-K?

There is no set tax rate for Form 1099-K since your gross receipts could be different types of income.

For business income, you’ll pay income taxes plus self-employment tax. Hobby income is generally only subject to income tax.

If the reported income on Form 1099-K isn’t taxable, you, of course, won’t have to pay taxes.

How much should I set aside for taxes for a 1099-K?

A good starting rule of thumb is to set aside 30% of your business income or 15% of your hobby income for taxes. See Estimated Taxes to learn more about what you should save for taxes and when you have to pay.

Where do I enter my 1099-K on form 1040?

You don’t specifically enter your 1099-K on Form 1040. You also generally don’t need to attach it.

Report business income on Schedule C. Report hobby income as other income on Schedule 1.

When your tax preparation software asks you to enter your 1099-Ks, it’s only doing that to help you keep track of everything.

What happens if my income on Form 1099-K is reported on another tax form?

If someone incorrectly issues you a Form 1099-NEC or other tax form for income that’s reported on 1099-K, ask that business to withdraw the 1099-NEC. You don’t want the IRS to think you made twice as much as you did.

If the business refuses to follow IRS guidelines resulting in double reporting of income, you have two options.

First, you can file your tax return correctly and ignore the extra 1099. You may get a letter from the IRS, in which case you’ll show your payment history to show that the income was double-reported.

If you’re worried about dealing with an IRS audit, you can also file a paper return. Include a letter saying you got an incorrect 1099, why it’s incorrect, and that the issuer refused to correct it.

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 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 tax rates apply to the difference in your purchase and selling price. 

In some cases, you can include transaction costs as part of the purchase price or as a reduction of the 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 settlement entity 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.

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

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.

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.

Conclusion

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.

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