Everything You Need to Know About IRS Form 1099-K

Published By: Chad Silver
Last Updated: October 23, 2023

See More in: IRS Forms, Tax Education

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All kinds of paperwork is flying in your direction at tax time, and that can be confusing and overwhelming. The Internal Revenue Service (IRS) also occasionally changes required forms, adding even more uncertainty to the process. The 1099-K is a relatively new form that the agency rolled out in 2012.

The 1099-K (Payment Card and Third Party Network Transactions) is an information return that the IRS uses to improve tax compliance. It helps the agency learn more about the payments a business has processed, and it reduces the risk of freelancers and business owners underreporting income from payment cards and third-party network transactions.

You may receive this form if you collect revenue through those types of transactions. Wondering what to do with your 1099-K? Want to learn more about this form? This guide will tell you everything you need to know.

Who Issues the 1099-K?

Payment settlement entities send this form to people who receive payments through them. Someone whose business processes payments through Square, for example, will receive a 1099-K. Taxpayers who receive payments from a company like Paypal may also receive a 1099-K. The reporting requirements are slightly different for both entities:

Payment Card Transactions

Payment card transactions refer to all payments accepted from debit, credit, and stored-value cards. Anyone who processes a payment card transaction will receive a 1099-K from the company that processes their transactions. There are no minimum thresholds. You will receive this form even if you only ran a single credit card for $10 all year long.

Third-Party Payment Network Transactions

A third-party payment network transaction refers to payments processed through a centralized third party. Paypal is perhaps the most common example. These companies facilitate the transfer of funds between a payer and a recipient. You will only receive a 1099-K from a third-party settlement company if you have processed over 200 payments worth over $20,000. You must surpass both thresholds, or the company will not send you a 1099-K.

Gross Payment Amount

The 1099-K, whether it comes from a payment card company or a third-party payment settlement company, shows your gross payments. It shows the total amount of payments processed for you by that company. It does not show any information related to credits, discounts, refunds, or fees.

You need to report the income from a 1099-K on your tax return, but you cannot just transfer the numbers from this form to your tax return. You need to double-check that the information is correct based on your records.

Special Considerations With the 1099-K

The amount on the 1099-K typically does not reflect your business’s actual revenue. You may need to make several adjustments, and the right steps vary based on your tax situation. Here are several cases where you will need to report a different number on your tax return than you see on your 1099-K.

Shared Credit Card Terminals

A payment processor will only issue a single 1099-K for a single credit card terminal. You need to split up the payments and document the numbers clearly if the 1099-K includes charges from multiple people or businesses sharing a single terminal.

Double-Reporting

Some companies might send you a 1099-NEC if they paid you more than $600 for contract labor. This income may also appear on your 1099-K if the company paid you through a third-party settlement company. Make sure not to double-report this income, or you will face a higher tax liability than necessary.

Cash-Back for Debit Cards

The 1099-K shows gross receipts. This means that if you offer customers cash back on their purchases, the amount of the purchase and the cash back will appear on the 1099-K. You need to track cash back issued through the year and make sure to subtract this amount from your 1099-K.

The income shown on your 1099-K may also need to be increased. Any revenue from other sources, for example, should be accounted for on your tax return in addition to what’s reported on the 1099-K.

Things to Avoid With the 1099-K

The 1099-K looks like a fairly straightforward form, but it’s a form that can be tricky to get right. The 1099-K is not an accurate representation of your business’s income, so you need to use other means to track your revenue throughout the year. Here are some common mistakes people often make with a 1099-K. You need to avoid these errors if you want to ensure that you file an accurate tax return.

Payment settlement companies only send you a 1099-K if you receive a certain number of payments over a certain amount. People who don’t receive enough payments to get this form still need to report their payments through the settlement company as income on their tax returns. Make sure to document the discrepancies when you report a different amount than what appears on your 1099-K. Keep proof of the information that backs up what you claimed. This information is critical if the IRS disputes your return or reaches out for more details.

Contact the Silver Tax Group for Help With the 1099-K

Misreporting your income can cause you to pay more tax than it should, and in some cases, it can get you in trouble with the IRS. We can help you understand what to do with your 1099-K and the rest of the tax documents you receive. Contact the Silver Tax Group today to talk about the 1099-K or your other tax concerns. We will help you deal with the complexities of tax prep and planning, and we will provide you a skilled defense in any disputes with the IRS.