If you received a Form 1099-K reporting payment card or third party network transactions but don’t have a business, you may be wondering if you need to report this income on your tax return. The short answer is yes, you do need to report it even if you don’t consider it business income. Here’s what you need to know about 1099-K reporting requirements and how to handle this income on your taxes if you don’t have a business.
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions, is an information return used to report payment transactions to the IRS. It is issued by payment settlement entities like credit card companies and third party payment networks such as PayPal, Venmo, and others. The form reports the gross amount of payment card/third party network transactions for the calendar year for a payee. Some key things to know about 1099-K:
- Issued by credit card companies, PayPal, Venmo, Square, Stripe and other third party payment processors.
- Reports gross amount of payment transactions – does not take into account fees, refunds, chargebacks, etc.
- Threshold for 2022 is $600 in gross transactions for issuance.
- Sent to payees by January 31 for prior year transactions.
- Copy sent to IRS matching payee tax ID number (SSN or EIN).
So in summary, if you received payments through third party payment networks (like selling items on eBay, Etsy, Facebook etc and getting paid through PayPal) or received business payments via a credit card processor, you will get a 1099-K reporting those gross transaction amounts if they exceed $600.
Do I Have to Report 1099-K Income If I Don’t Have a Business?
Even if you don’t consider the transactions reported on the 1099-K to be part of a business, you still must report the income on your tax return. The IRS considers payment card/third party network transactions as taxable income regardless of whether you received them as a business or as personal transactions.
Some common situations where non-business taxpayers receive 1099-Ks and have to report the income:
- Personal use of PayPal, Venmo, Zelle or other payment apps
- Payment processors like Square and PayPal for infrequent sales
- Payment apps used to receive money from friends/family
- Selling items occasionally on eBay, Craigslist, Facebook etc.
- Receiving tips or other payments through Square or PayPal
Even if you are not actively engaged in a business, the income reported on 1099-K reflects gross payment transactions that the IRS considers taxable. Therefore, you must report it to avoid a mismatch between reported income and income shown on your return.
Exceptions
In a few limited cases, you may not have to report 1099-K income:
- Reimbursements for personal outlays. If you were reimbursed for personal bills paid on behalf of someone else, it would not count as income.
- Gifts received through payment apps from individuals. Cash gifts are not taxable income.
- Incorrect 1099-K. If the payments were not actually received by you or the amount is substantially wrong, you may not have to report it. But you will need to get the issuer to correct it.
However, in most cases if you receive a 1099-K, you will be expected to report the income listed on it even if you don’t consider it to be from a business.
How Do I Report 1099-K Income Without a Business?
So how should you report 1099-K income if you don’t have a formal business? Here are some options for reporting this income on your individual tax return:
Report on Line 21 – Other Income
The simplest option is to report the gross amount shown on 1099-K as other income on Line 21 of Form 1040. You don’t have to provide any other details or break down the amount into categories. The disadvantage of this method is that you are stuck paying income tax on the full gross amount rather than the net profit.
Report on Schedule 1 – Miscellaneous Income
You can break down the 1099-K income a bit more by reporting it on Schedule 1, Line 8 – Other Income. Then write “1099-K Income” and the amount in the description field. This lets you detail the source a bit clearer, but still doesn’t allow reducing it by expenses.
Report on Schedule C – Profit or Loss From Business
If the income reported on 1099-K is in fact tied to a freelancing, side business or selling activity, you can report in on Schedule C even if you don’t consider it a formal business. The advantage here is you can deduct related expenses to reduce the net profit amount on which you are taxed.
For example, if you sold $1,000 worth of items on eBay but had $300 in expenses, reporting on Schedule C would let you deduct the $300 in expenses and just pay tax on the $700 profit. This results in lower tax than paying tax on the full $1,000 of 1099-K income.
Examples
Here are some examples of how to report 1099-K income in different scenarios:
Scenario | Reporting Approach |
---|---|
Received $800 in Venmo transfers from family/friends as personal gifts | Do not report on tax return |
Sold used furniture worth $1,200 on Craigslist using Venmo | Report $1,200 on Line 21 as other income |
Earned $5,000 as an Uber driver paid via 1099-K. | Report on Schedule C and deduct related car expenses |
Received $1,500 in PayPal payments by doing occasional freelance work | Report on Line 21 as other income |
Earned $8,000 on Etsy selling handmade crafts with $3,000 in expenses | Report income on Schedule C and deduct $3,000 expenses |
As these examples illustrate, reporting approach depends on the nature of the transactions. To minimize tax, report on Schedule C with expenses if a side business. Otherwise, use Line 21 or Schedule 1 for straightforward reporting.
Do I Owe Self-Employment Tax on 1099-K Income?
If the income reported on 1099-K is tied to a side business activity, you may owe self-employment (SE) tax in addition to income tax. SE tax is the equivalent of payroll taxes for self-employed individuals. It consists of 12.4% for Social Security and 2.9% for Medicare.
So if your 1099-K income is considered earnings from self-employment, you would owe 15.3% on top of regular income tax.
Some situations where you may need to pay SE tax on 1099-K income:
- Driving for a ride sharing service like Uber/Lyft
- Income earned from freelancing or consulting work
- Selling products or services through sites like Etsy, eBay, etc.
- Earning income from rentals
However, if the 1099-K income is just from personal transactions or represent reimbursements/gifts to you, they would not be subject to SE tax, just regular income tax. The type of transaction determines whether SE tax applies or not.
SE Tax Threshold
You only owe SE tax if your net self-employment earnings exceed $400. So if you have minimal profit after deducting expenses from 1099-K income, you may fall under the SE tax threshold. However, you still must report the income even if no SE tax due.
Conclusion
Receiving a 1099-K for payment card or third party network transactions can be confusing if you don’t have a formal business. However, the bottom line is that this income still needs to be reported in most cases. The best approach depends on the nature of the transactions – personal payments can be reported simply on Line 21, while side business income allows you to detail deductions on Schedule C. Understanding the differences can help you report 1099-K income properly even without a business.