There’s a lot of buzz around the new changes to the 1099-K Form and now you’re trying to figure out if and how they affect you. Or maybe you’ve only recently heard about Form 1099-K for the first time. Regardless of how much you know (or don’t know) about Form 1099-K, here are 5 important things you need to know about Form 1099-K.
Let’s review what the 1099-K even is and why it’s used. This should cover the most important things you need to know about the 1099-K.
1. What is Form 1099-K?
A 1099-K (Payment Card and Third Party Network Transactions) is a transaction record from third-party payment networks. Copies are sent to the IRS, state, and business or persons receiving the payments. Payment networks are things like Stripe, Square, Venmo, and PayPal, as well as online marketplaces (Amazon, eBay, Etsy, etc.).
That’s right. If you use any of these methods to accept payments for your business, then you should get a 1099-K. These networks are required to report this information on the 1099-K to make sure taxpayers accurately report income on their tax returns.
If you received more than $600 through a third-party payment network, then you should be on the lookout for the 1099-K in January of the following year.
2. 1099-K vs. 1099-NEC
If you’re used to receiving a 1099-NEC, you might think these two forms are the same thing.
Hold on because they aren’t!
Businesses issue their contractor payments the 1099-NEC to show how much was paid to that contractor during a tax (calendar) year. If $600 or more was paid to a contractor, then the 1099-NEC might be submitted.
The difference is that the 1099-NEC should reflect ALL payments from that business to that contractor. This can include cash, check, ACH, direct deposits, and even possible electronic third-party payment processors. It truly depends on the agreement between the contractor and the business paying them on how the contractor receives payments.
This is where it can get sticky. If you receive payments via a credit card as a contractor, then technically the business does NOT need to provide a 1099-NEC. Instead, that amount will be shown on your 1099-K.
This is why it’s important to keep excellent records. You can compare numbers via your own accurate records to make sure you aren’t reporting the same income twice on your income tax return or paying tax twice on the same income.
3. 1099-K in 2022
Prior to 2022, if you received less than $20,000 in payments from third-party networks, then you also probably didn’t receive Form 1099-K. If you received more than $20,000 in payments and had over 200 separate transactions to reach that amount, then you did receive a 1099-K.
However, that may change for you this year.
The American Rescue Plan Act of 2021 introduced a new requirement: any person or business that receives total payments above $600 in a given year from credit cards or third-party processing payment providers will receive Form 1099-K.
Reminder: This only applies to methods that involve card payments, so ACH payments, direct deposits, Zelle, and wires are excluded.
Starting January 2023, a Form 1099-K needs to be created if you receive over $600 in payments for the 2022 calendar year. The minimum amount of individual payments (previously set at 200) is no longer applicable.
Therefore, whether you received one payment of $600.01 or 601 payments of $1, you’ll still get a 1099-K from your third-party payment processor.
WARNING: This is only applicable to business accounts for Venmo, PayPal, etc. So it’s really important to use a business account for all business-related transactions. Personal transactions should be sent via a personal account and can include things such as your friend paying you back for dinner.
I’ll repeat that. Do NOT use a PERSONAL third-party payment account to receive business income. ONLY use BUSINESS accounts to receive BUSINESS income. Keep business and personal transactions and money SEPARATE!
4. How does this impact you?
If you are a business owner or freelancer or contractor that receives or sends payments via a third-party payment processor, then you need to be paying attention.
Let’s say all of your income is from a third-party processing payment provider (i.e. no direct sales such as cash, ACH, direct deposits, or checks), you better have your books accurate and complete. This means you need to make sure your income or revenue on the books shows ALL income or revenue.
What do I mean by this?
Let’s review net revenue vs. gross revenue.
Net revenue is all your income minus discounts, returns, etc.
Gross revenue is all your income without subtracting ANY deductions or allowances.
Why is this important?
Because the 1099-K reports the gross amount of all payment transactions and may include sales tax collected on your behalf. Also, payment processor fees, refunds, and returns have not been deducted from this number.
This means that if you are currently categorizing only net receipts or net revenue received from your third-party provider, your revenue or income will show as less than gets reported on a 1099-K.
REMINDER: You need to track and record the full amount received from the third-party processor minus processing fees as expenses.
If your 1099-K for 2022 does not match your income reported on your 2022 tax return, you may be required to justify the discrepancy to the IRS and possibly a state. This is especially important if the 1099-K amount in Box 1a exceeds the total amount you report on your tax return.
See the problem here!?!?!
Starting to understand why I stress separating business and personal transactions. Don’t mix personal and business payments. It could end up getting you into trouble and causing extra stress. Make sure you are using BUSINESS accounts for all your business transactions including Venmo and PayPal. On the flip side, make sure your friends ONLY pay or reimburse you for personal things via a personal account.
Didn’t go to school to understand all the complicated tax laws?
Don’t worry, we did so you don’t have to.
5. How to report Form 1099-K on your tax return
First things first. Make sure you are keeping good records throughout the year and have a tried and true process for bookkeeping. This will alleviate pain and stress at tax time.
Trust me here. You don’t want to be scrambling and spending hours of time trying to remember all the transactions or possibly going through pages and pages of bank and credit card statements to create your books for tax time.
If your books are clean and accurate, you can simply review the number from your accurate profit and loss or income statement to the number reported on the 1099-K. If your number matches or is less than the number on the 1099-K, then you’re good to go. It can be that simple if your books are clean.
However, if you receive more than one 1099-K, you need to add up the total from each of the 1099-Ks to come up with your total income. Once you add them up, that number should match your books. Easy, right?!!?
If the 1099-K is only one part of the income you receive, that’s no problem. As long as your income number is equal to or higher than the total reported on the 1099-K, you’re all good. Translation: The IRS won’t bother you.
Once you determine the income showing on your records is equal to or higher than the 1099-K amount, then you use that number as your sales or revenue on your tax return. The form you use to report income and expenses depends on your business entity structure.
Make sure you use the right one for your business. Regardless of the form, they all ask for total sales and allow you to deduct all your expenses.
Hopefully, after reading this article you won’t be freaking out when you receive Form 1099-K from your payment processor next January. If you think about it, it’s just another piece of paper that’ll help make sure your numbers are accurate (and keep you out of trouble with the IRS).
Remember to keep complete and accurate records of your business income to prevent double income trouble. This includes income that may be reported on Form 1099-K. Plus, if your books are accurate, it will help you defend the information reported on your income tax return.
If you are currently categorizing only net receipts received from a third-party provider, you will need to start tracking the full revenue received. Then you can deduct the processing fees and refunds separately. I feel like I’m always repeating myself but it’s worth ensuring you know the rules. Remember to keep your business transactions and personal transactions separate.
If you have questions or need help adjusting your bookkeeping process, check out my course, Freedom Financial Roadmap. It can help you understand all your bookkeeping processes, recording income, taking expenses, understanding and calculating taxes and so much more!