Do you take credit cards at your business or run an online store? Chances are, you’ll be receiving a 1099-K form for your tax reporting. What is it? What do you do with it? What are the important things to keep in mind? All of these questions will be answered in this post.
What is a 1099-K? A Brief History
The 1099-K for small businesses was approved in 2008 and began making an appearance in the 2011 tax year. (Oddly enough, it was snuck into the 2008 Housing Assistance Tax Act, despite being unrelated to housing.) Officially known as the “Payment Card and Third Party Network Transactions”, the IRS created the form as a way of encouraging more accurate reporting of income from small businesses. Payment settlement entities, including payment card processors and third-party settlement organizations such as PayPal, Venmo, eBay, and Etsy, are responsible for issuing Form 1099-K. The form includes taxpayer information such as name, address, and Taxpayer Identification Number (TIN). Form 1099-K reports the gross amount of all reportable payment transactions processed by these entities.
When do I receive a 1099-K?
The 1099-K form is sent to you by your processor, whether it is a credit card processor (merchant account provider) or an online retailer such as PayPal, Amazon, or Etsy (these count as third party network transactions). Now, the third-party network transaction part matters. If you’re only using a PayPal store and don’t have a terminal you run transactions through, you will only receive a 1099-K if you have processed at least $20,000 and run at least 200 transactions in the calendar year for that specific processor. This is known as the IRS reporting threshold, and it applies to payments received in the previous calendar year. A credit card processing company sends you a 1099-K form regardless. Either way, the 1099-K should arrive in January and reports your gross annual sales that have been processed with cards in the previous year, which you add into your profits and overall income reporting on your taxes. Form 1099-K must be issued by January 31 for the previous tax year. You may receive more than one form if you process payments through multiple platforms. It will also come with a breakdown of transactions by month.
“The 1099-K does NOT account for refunds, chargebacks, gift card purchases, and cash back…if you have a lot of returns or chargebacks, you could be paying too much in taxes unnecessarily.”
Not all income reported on a 1099-K is taxable. For example, personal payments or items sold at a loss may appear on your form but are not subject to tax. Payments labeled for ‘family and friends’ on platforms like PayPal and Venmo are not subject to 1099-K reporting. Payments for personal transactions, such as gifts from friends or family, should not be reported on a 1099-K. It’s important to correctly categorize personal payments and personal transactions to avoid unnecessary tax reporting.
Now before you completely fall asleep, this is the point where your teacher slaps the ruler on your desk and tells you, “pay attention, this is important!” The 1099-K does NOT account for refunds, chargebacks, gift card purchases, and cash back. What does that mean? Well, it means that if you have a lot of returns or chargebacks, you could be paying too much in taxes unnecessarily. That is why it’s a very good idea to keep a strict record of the differences between electronic transactions you made money on (purchases), and those that you did not (refunds, cash back from debit, chargebacks, etc). It has the potential to save you a lot of money and will make your reporting more accurate.
Always check the information on your Form 1099-K for accuracy, including your taxpayer identification number and gross payment amount. If your form has incorrect income or other errors, contact the payment processor to request a corrected form and keep documentation of any communications. Use the information on Form 1099-K along with your other records to determine whether the income is taxable.
1099-K and Record Keeping: Best Practices for Your Business
When it comes to running a business and reporting your taxable income, keeping accurate records is more important than ever—especially if you receive a 1099-K form. Payment settlement entities, such as payment apps, credit card processors, and online marketplaces, are required to report your gross receipts from payment card transactions and third party network transactions directly to the IRS. This means that every payment processed through these channels is tracked and reported, making it crucial for you to maintain detailed records of all your business transactions.
To stay compliant and avoid any surprises at tax time, make sure you’re tracking every payment card transaction and third party network transaction throughout the year. This includes sales processed through payment apps, online marketplaces, and any other payment settlement entity. Your 1099-K form will show the total gross receipts for the previous tax year, but it won’t account for refunds, chargebacks, or other adjustments—so your own records should fill in those gaps.
Best practice is to reconcile your business records with the amounts reported on your 1099-K form so you can avoid costly payment processing mistakes. Keep copies of merchant statements, payment app reports, and any documentation related to refunds or disputed transactions. This way, you can accurately report your business income, avoid merchant account holds and freezes, and ensure that your taxable income matches what’s been reported to the IRS. Using accounting software or digital spreadsheets can make it easier to organize your transactions and quickly spot any discrepancies.
Remember, the IRS uses the information from your 1099-K to verify your reported income. By keeping thorough records of all payment transactions, you’ll be prepared to answer any questions and pay taxes only on your true business income—not on amounts that were refunded or never actually received. Good record keeping is your best defense against errors and helps your business stay on the right side of tax regulations.
I got a 1099-K for processing payments. What do I do now?
Well, you pay your taxes. Duh. In fact, you must report all business income on your tax return, even if you do not receive a 1099-K because you are below the reporting threshold. If you receive a 1099-K for business income, you must report it on your income tax return, typically using Schedule C if you are a sole proprietor or self-employed. Schedule E is used to report rental income or income from partnerships, and if you have multiple sources of income, you may need to file multiple returns or schedules. You can deduct business expenses related to income reported on Form 1099-K to reduce your taxable income, but you cannot deduct expenses for hobby sales or personal items. If you sold personal items at a loss, you can report the loss to avoid paying taxes on it, but you cannot deduct the loss from your taxes. If you sold personal items for a profit, that profit is taxable and must be reported on your tax return—the taxable gain is the difference between the sale price and the amount you originally paid. Not all amounts reported on Form 1099-K are taxable; only your net income after deducting allowable business expenses is taxable, and you may owe taxes on that net profit. Form 1099-MISC is generally used to report payments made directly to independent contractors, while Form 1099-NEC is issued by businesses that utilize freelancers or independent contractors. You may also have to report other income, such as hobby sales, rental income, or side business income, on your tax return. Your business entity type (sole proprietor, partnership, corporation) and employer identification number (EIN) may affect how you report income and which forms you use. If you have multiple sources of income, you may need to organize and report them across multiple returns or schedules.
You should make sure that the sum of all of your 1099 forms and gross transactions do not exceed your total profits and account for any reductions such as refunds, as I mentioned above. The amount on your 1099-K is added to the gross profits for the year and is really just a way for the IRS to get a more accurate picture of what you made.
Time for a Quiz!
Here’s the scenario: Betsy has an eBay store and processes all of her transactions through PayPal. She ran 150 online sales last year and made $30,200. She also has a brick and mortar store which she uses a merchant account provider to process for. She ran about 190 sales last year and made $7,000. How many 1099-K forms will she receive, and from whom? What will she have to report? Answer: She will only receive one form from her merchant account provider unless PayPal is feeling especially generous. PayPal, which counts as a third party network processor, is not required to send her a 1099-K because she ran less than 200 transactions throughout the year, even though she made more than the $20,000 limit. However, she still has to report the sales to the IRS in her gross profits, there’s just no official form outlining how much was sold. Pretty confusing, huh?
In conclusion, the 1099-K form, like many tax-related items, can be confusing if you don’t understand what to look for. However, by reading this post hopefully you have gained a better understanding of what a 1099-K is for, and when you will receive one.
Below are several resources for you to look at if you feel like diving in further. Happy profit reporting! Official Instructions for the 1099-K from the IRS
Form 1099-K Reporting Requirements from the IRS
Understanding Your 1099-K Form
FAQs About Payment Card and Third Party Network Transactions
