If you received a Form 1099-K from a third-party payment network reporting your business transactions, you may be wondering if you need to report that income on your tax return. Here’s what you need to know about 1099-K reporting requirements:
What is Form 1099-K?
Form 1099-K, also known as the Payment Card and Third Party Network Transactions form, is an information return used to report payment transactions made through third-party payment networks. These networks include:
- Payment card transactions (debit and credit cards)
- Third party payment networks like PayPal
- Online marketplaces that process payments like Etsy, eBay, etc.
Merchants and businesses who accept payments through one of these networks will receive a 1099-K if they meet both of the following criteria:
- You had more than $20,000 in gross payment volume reported.
- You had over 200 payment transactions for the year.
The 1099-K shows the total dollar amount of the transactions processed for your business so you can properly report that income to the IRS.
Do I have to report 1099-K income?
In most cases, yes – you do have to report all income shown on Form 1099-K. The IRS considers payment processing networks like credit cards and PayPal to be credible third-party sources for reporting income. Income reported on a 1099-K should be included as part of your gross business income for the year.
There are two scenarios where you may not have to report 1099-K income:
- If the income reported is lower than your total gross income for the year. For example, if you received a 1099-K reporting $18,000 of payment transactions, but your gross business income was actually $25,000, you would only report the $25,000 total on your Schedule C or other business tax form.
- If the 1099-K reports personal, non-business transactions. For example, if you sold some furniture online but do not operate an online sales business. However, you’ll still want to report this income if required for your personal tax return.
In these cases, speak to a tax professional to determine if you are required to report the 1099-K income.
Where do I report 1099-K income?
Most sole proprietors, single member LLCs, and independent contractors will report income from Form 1099-K on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). The income will be included as part of your gross receipts or sales.
Partnerships and multi-member LLCs that are taxed as partnerships will report this income on Form 1065, U.S. Return of Partnership Income on their gross receipts or sales. Each partner’s share of income will be reported on Schedule K-1.
Corporations will report this income as part of gross receipts or sales on Form 1120 or Form 1120-S.
Do I need to report expenses related to 1099-K income?
Yes, you can deduct business expenses related to your 1099-K income. Common expenses include:
- Cost of goods sold
- Credit card processing fees
- Website hosting fees
- Online marketplace fees
- Packing supplies
- Postage and shipping
You’ll report these business expenses on the same form where you report your 1099-K income – Schedule C, Schedule C-EZ, Form 1065, Form 1120, etc. Keep accurate records of your expenses to support the deductions.
What if I didn’t receive a 1099-K?
You still must report all income earned from payment processing networks, even if you don’t receive a 1099-K. The IRS requires you to report all taxable income, regardless of whether you received a tax form or not.
Double check that you truly did not meet the reporting thresholds if you did not receive a 1099-K but know you had payment transactions. If you should have received one, you can request that the company reissues it.
Otherwise, be sure to track all reportable transactions so you can accurately report the income. The IRS will expect you to have records to support revenues reported if you did not receive a 1099-K.
Can I be taxed on 1099-K income twice?
You may be concerned about reporting 1099-K income that is already included in a different form, resulting in double taxation. Here are some scenarios where that could occur and how to prevent double counting:
- Personal and business transactions combined: If you use the same payment processor for personal and business transactions, the 1099-K may include both. Be sure to only report the income related to your business activity.
- Income reported on 1099-MISC: Some client payments may be reported on both 1099-MISC and 1099-K. You would only report the income once on your return.
- PayPal transfers: If you transfer PayPal funds to your bank account, both PayPal and your bank may issue a 1099-K. You’d want to identify any duplicate reporting.
Review income amounts reported across all tax forms you receive to look for duplication. Deductions like fees, refunds, and reversals may also prevent double counting.
Can I deduct 1099-K fees and taxes?
Yes, you can deduct third-party payment processing fees and taxes related to your 1099-K income, including:
- Payment network fees – Deduct transaction, processing, and other fees charged by the payment network.
- Interchange fees – Fees paid per transaction to payment networks and banks.
- Chargebacks – Fees paid when customers dispute a charge.
- Payment taxes – Any taxes levied on your transactions are deductible.
Be sure to maintain records such as monthly statements to substantiate these fees and taxes if deducting them on your return.
What if I have losses reported on 1099-K?
It’s possible your 1099-K could show negative income if refunds and fees exceeded your actual reportable income for the year. You may still be required to report the information from the 1099-K showing the loss on your Schedule C or other business return.
You cannot use a 1099-K loss to offset other income on your tax return. But it can be carried forward to future tax years to offset future 1099-K income. Talk to your tax preparer about the best way to report a loss from your 1099-K.
Can I get in trouble if I don’t report 1099-K income?
Yes, there can be penalties and interest if you do not report income shown on Form 1099-K. The IRS matches information returns like 1099-Ks to amounts reported on tax returns.
If there is a discrepancy between your 1099-Ks and your reported income, the IRS will send you a notice of the underreported amount. You’ll have a chance to explain the difference, or pay the tax, penalties, and interest on the additional income.
Civil and criminal tax penalties may apply in cases of intentional unreported income. The best protection is reporting all 1099-K income properly when you file.
What if I made a mistake reporting 1099-K income?
If you discover you made a mistake reporting income from Form 1099-K, you’ll need to file an amended tax return. Some common mistakes include:
- Forgetting to report 1099-K income entirely
- Reporting it on the wrong line or form
- Misreporting the amount
- Claiming improper deductions related to the income
You’ll use Form 1040X to file an amended return and correct the reporting error. Pay any additional tax, penalties, and interest you now owe. The IRS recommends amending a return as soon as possible after discovering the error.
How long do I need to keep 1099-K records?
You must keep documentation related to income reported on Form 1099-K with your tax records for at least 3 years from the date you filed your return. In some cases, you may need to keep them longer if you underreported income.
The IRS can audit returns up to 3 years after filing, and 6 years if substantial income was underreported. Having organized records proves the income, expenses, and deductions you reported.
What records should I keep for 1099-K income?
Keep any supporting documents you used when reporting 1099-K income on your tax return. Recommended records to keep include:
- The Form 1099-K itself
- Bank statements showing deposits
- Invoices and sales records
- Credit card and payment network monthly statements
- Receipts for deductible expenses
Maintaining thorough records makes it much easier to respond if the IRS ever inquires about your 1099-K income reporting.
Do I need to provide 1099-K to contractors?
If your business paid $600 or more to any unincorporated contractor or freelancer over the course of a year, you may need to provide them with a 1099-K reporting their compensation. This includes:
- Independent contractors
- Freelancers
- Consultants
- Other self-employed individuals
You are required to complete Form 1099-K for contractors paid through third-party networks like credit cards, PayPal, eBay, Etsy, and similar platforms. Provide Copy B to the contractor by January 31 for the prior tax year and file Copy A with the IRS.
Conclusion
Receiving a 1099-K does create an additional tax reporting requirement for your small business. Be sure to include this income when you file. Keep detailed records to support the amount and validate any related deductions you claim. Pay all taxes owed on 1099-K income to avoid penalties for underreporting. With proper documentation and reporting, 1099-K income is straightforward to manage at tax time.