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Form 1099-K
What Online Sellers Need to Know About Form 1099-K
It can be difficult for sole proprietors to keep track of the endless tax forms that every business needs to file. With nearly two dozen 1099 forms out there, it takes work to know which one you need to file. Here's how to get a better understanding of 1099-K forms, what they are for and why you need to use them if you own your own business as an online seller.
If you accept credit card payments, online transactions or payments from a third-party like Paypal or Venmo, you will receive 1099-K forms from the established credit card companies or third-party payment processing companies that you have used foryour business.
Table of contents
What is a 1099-K Form and what is it used for?
Form 1099-K is a tax form issued by the Internal Revenue Service (IRS) to report online transactions made through credit or debit cards or third-party payment network transactions such as Paypal, Venmo, Square, Stripe and Stax.
One copy of the 1099-K goes to the IRS, and the other is sent to you by the relevant platform. This means everyone can be on the same page. In addition, the 1099-K form ensures that online retailers are reporting tax information.
What is a 1099-k form used for?
Until the end of 2021, you would only receive this form if you sold more than $20,000 in goods. Sadly, all good things come to an end, and in 2022 the IRS lowered that amount from $20,000 to $600. So, every online seller who sells $600 or more will receive a 1099-K.
If you sell products online, you'll likely receive a 1099-K at the end of the year that summarizes your transactions.
The 1099K form only includes digital business transactions. It does not report personal payments, like sending money to family, or other non-business related expenses, even if the transactions were done via online payment networks.
If you're an online seller, remember that Form 1099-K is reported to the IRS by the online transaction companies you use. The form includes your social security number or taxpayer-identification number, which means the IRS will know you’ve been receiving money through online payment processors. So, don't forget to report this income on your Schedule C.
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Form 1040
This is the master tax form that every American, freelancer or not, needs to fill out after the tax year ends.
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US Tax Forms
The most important tax credits self-employed and freelancers.
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Form 1099-K
If you received $600 or more in online credit card payments during the tax year, you will need to receive this form in the mail to confirm the payment amounts.
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Form 1099
All self-empoyed individuals and freelancers who earn more than $600 during the tax year use this form to report their income to the IRS.
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Form 1099-NEC
If you earn an income for your work done as a self-employed individual or freelancer, this form is where you will see that income reported to the IRS.
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Form 1099-MISC
You will use this form to confirm any payments you received outside of your freelance or independent contractor work, like prize money or money for healthcare.
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Form 1040
This is the master tax form that every American, freelancer or not, needs to fill out after the tax year ends.
Share
US Tax Forms
The most important tax credits self-employed and freelancers.
Share
Form 1099-K
If you received $600 or more in online credit card payments during the tax year, you will need to receive this form in the mail to confirm the payment amounts.
Share
Form 1099
All self-empoyed individuals and freelancers who earn more than $600 during the tax year use this form to report their income to the IRS.
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Who receives a 1099-K?
All online retailers receive the 1099-K form if they accept online credit card payments to sell products or services.
The 1099-K requirements 2022 came to life recently. Before 2021, you would receive a 1099K form if you had gross payments of more than $20,000 and more than 200 transactions.
Today, you receive a 1099-K if the gross payments you received during the tax year total more than $600.
In general, if you receive a 1099-K, you're considered a sole proprietor. A sole proprietor is someone who does not have a company like a C-Corp or S-Corp but is a single person who owns the business. This means they are the only business owner and haven't formed a business entity.
As soon as you start working on freelance or side-gig projects, or you start your own business, you are automatically considered a sole proprietor.
For example, if you own a catering company, tutoring service, house cleaning service or landscaping company, these are all examples of sole proprietorships. Selling products online can also mean you're a sole proprietor. Receiving payment online for those products via third-party payment processors would qualify you for the 1099-K.
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Changes to Form 1099-K
Why did the 1099-K form change in the first place? Before the recent change, many online sellers were misreporting or under reporting their income from online sales. This meant that the IRS was missing out on a lot of tax revenue. With the lower income threshold for reporting requirements, many more taxpayers are now sent a 1099-K form.
The 1099-K also falls under the American Rescue Plan Act of 2021. Under this plan, the IRS hopes more taxpayers will accurately report their income, including any online transactions like the payments that online sellers receive.
This change means a lot more people will be receiving 1099-K forms. Unfortunately, it also means more paperwork for you.
You might be wondering if there's a way to avoid the 1099-K Form, but there really isn't. With the new changes the IRS has made to the form, it’s now going to be a lot harder to avoid the income-reporting requirements.
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Form 1099-K deductions
You can deduct some expenses based on your credit card payments reported on Form 1099K. Examples of 1099-K deductions include:
- Advertising costs: you can deduct costs related to advertising for your business.
- Web hosting: payment for web hosting fees can count as a deduction.
- Internet access: you use the internet for your business, and you can write this cost off as a deduction.
- Credit card or merchant fees: the credit card or merchant fees that you pay can qualify as deductions.
- Home office: using part of your home exclusively for your business may qualify you for home-office deductions.
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Differences Between Form 1099-K and Form 1099-MISC
Although Form 1099K and Form 1099-MISC are both 1099 forms, they are very different, and it's important to understand how they differ, because you may receive both.
If you earn more than $600 during the year in freelance or self-employment income, you may receive a Form 1099-MISC for any miscellaneous compensations. For example, if you provide lawn care services, your customer will not send you Form-1099 MISC. But a company must send you Form 1099-MISC if it gave you a prize or award that was valued at more than $600.
If you accept credit or debit card payments totaling $600 or more using a third-party payment processor, you will receive the IRS 1099-K at the end of the year summarizing your online payment transactions.
An important distinction is that 1099-K form reports your online business transactions, and Form 1099-MISC reports income paid for your services regardless of the payment method.
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Filing 1099-K Form
The good news about the 1099-K is that as a freelancer, business owner or self-employed person, you don’t have to file 1099-K form.
Following Form 1099-K requirements, credit or debit card companies and third-party payment processors are required to file 1099-K forms by submitting them to the IRS. You will receive a copy of the IRS 1099-K forms that they send to the IRS, and you should always check to make sure the information they report lines up with your own records.
With that in mind, it’s up to you to maintain a record of all your online transactions, so that you're able to eventually reconcile them with the 1099-K forms you receive at the end of the year. When you report the income you received from online sales on your Schedule C, this information should be the same as what the IRS has.
Let’s look at the steps for using 1099-K. First, Copy 1 gets submitted to your state tax department by third-party payment vendors.
Copy B is filled out and sent to you by third-party payment vendors, who report every transaction.
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When will you receive a 1099-K?
Every digital payment vendor must send you a Form 1099-K by January 31, if it has processed at least $20,000 worth of digital transactions and at least 200 transactions for you.
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Quick tip
These kinds of companies use the 1099-K to report payments that online sellers receive to the IRS: credit card companies, debit card companies, gift card companies and payment apps like Venmo and PayPal.
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