These days, debit cards and credit cards like Visa, Mastercard, Discover and American Express are commonly used for all types of transactions.
And for sure, you have one of these payment apps installed on your phone – Venmo, Paypal, Stripe, Shopify, and Cash App.
If you are an independent contractor, freelancer, gig worker, side hustler or a businessperson, most definitely, you have paid your contractors or have been paid for your services or your business through any one of these means.
And because of this, you will most probably need to learn about IRS (Internal Revenue Service) Form 1099-K.
What is Form 1099 K
“Form 1099-K, Payment Card and Third-Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance.” – IRS
Form 1099-K is a return issued for payments made in settlement of reportable payment transactions using any of the following:
- Debit cards, credit cards, stored-value cards (gift cards)
- Third party-network providers like Venmo, PayPal, Stripe, Shopify etc.
The 1099-K will be issued by the card companies and third-party network providers, also referred to as Payment Setllement Entities (PSE).
Who Shall Receive a 1099-K
You are likely to receive a 1099-K by the 31st of January, if in the prior calendar year, you have received payments:
- from all payment card transactions (e.g., debit, credit, or stored-value cards)
- In settlement of third-party payment network transactions above the minimum reporting thresholds as follows:
- For returns for calendar years prior to 2022:
- Gross payments that exceed $20,000, and
- More than 200 such transactions
- For returns for calendar years after 2021:
- Gross payments for goods or services that exceed $600, and
- Any number of transactions
- For returns for calendar years prior to 2022:
The 1099-K will be issued only to those accounts that are listed as business or merchant accounts and personal accounts whose transactions are tagged as “goods and services” and not “friends and family”
If you are a contractor that mixes the use of your card account for business and personal transactions – you need to ensure that payments for your services are classified as “goods and services” to be included in your 1099-K.
If you are a businessperson with contractors, you can utilize these PSEs in paying your contractors. This will relieve you of the task of preparing the 1099-NEC.
What to do with the 1099-K that I Received
When reporting your business income, your return must reflect all business income received, be it cash, cards, or bank transfers.
The amount reflected in Form 1099-K represents the income received and therefore should form part of your gross business receipts when reporting your income tax return.
Let us Get Familiar with 1099-K
To ensure we understand the 1099-K we received, let us look at the key areas of the 1099-K. These are the highlighted portions of the form.
Box 1a – Gross Amount of payment card/third party network transactions
This box contains the total dollar amount of total reportable payment transaction without regard to any adjustments to credit
The amount reflected here should be reported as part of your gross receipts in Schedule C
Box 1b – Card Not Present transactions
This amount represents payments made without the presence of a card. This refers to online or phone transactions. Box 1a and Box 1b may reflect the same amount.
Box 2 – Merchant Category Code
This is a 4-digit merchant category code (MCC) that refers to the industry that the revenue generated belongs to.
Usually, you do not need to do anything here, but it is advised that the industry reflected here is consistent with the industry code reflected in your Schedule C.
Box 3 – Number of Payment Transactions
This refers to the number of transactions corresponding to 1099-K.
Prior to 2022, the number of digital transactions required was above 200; however, for tax year 2022, there is no minimum number of transactions required.
Box 4 – Federal Income Tax Withheld
This is for the amount withheld. Do not forget to report this on Box 4 or 8 of your 1040 return
PSE’s name and telephone number –
This is important to take note of. If there are any corrections on the 1099-K that you received, this is where you will find the contact details of the PSE who issued this return.
Generally, 1099s should serve only as verification tools of your gross receipts. It is always best practice to keep accurate records of all our business income and expenses.
At 1099 Accountant, we are your online bookkeeping, tax and accounting service firm and we will help you with your bookkeeping and tax filing while you go about your business.
Contact us at (855)529-1099, or make an appointment at https://1099accountant.com/contact/ or send us an email at email@example.com. We love referrals.