A 1099-K is a tax form used to report payment transactions made to you through payment networks like credit cards or third-party payment processors. You will receive a 1099-K if you received payments for goods or services through a third-party network that exceeded $20,000 and had more than 200 transactions in a calendar year.
What is a 1099-K?
A 1099-K is an informational tax form called the “Payment Card and Third Party Network Transactions” document. It reports the total payments you received through credit card transactions and third-party payment networks like PayPal, Square, Venmo etc.
This allows the IRS to track merchant income from electronic payment processing. If you run a business that accepts credit card or third-party payments, you may receive a 1099-K.
The 1099-K includes:
- Your personal information like name, address, Tax ID number
- Third-party payment network info
- Total number and dollar amount of payment transactions
- Card payments and third-party network payments broken out separately
- Federal and state tax withheld (if applicable)
This lets the IRS verify that the income reported on your tax return matches the payment information on the 1099-K.
When do you get a 1099-K?
Payment processors and third-party networks like PayPal must issue a 1099-K by January 31 for the previous tax year if:
- You had over $20,000 in gross payment volume as a merchant or seller.
- You had over 200 transactions in that calendar year.
Even if you did not hit both thresholds, payment processors can voluntarily issue a 1099-K for your records.
Who must file a 1099-K?
A 1099-K must be filed by a third-party payment network or payment settlement entity under the following circumstances:
- You processed payments for a participating payee (merchant or seller)
- That payee had over $20,000 in gross payment volume
- That payee had over 200 transactions
Participating payees who meet these criteria will receive a 1099-K. This includes merchants, sellers, small businesses, independent contractors, freelancers, gig workers, etc.
When will I receive my 1099-K?
Payment processors and networks like PayPal, Stripe, Square, Venmo etc. have until January 31 to mail out 1099-Ks for the previous calendar year. However, many companies send them out earlier, between late December and mid-January.
For example, if you received reportable payments in 2022, you can expect your 1099-K to arrive by January 31, 2023. Make sure to check your mailbox and email during this timeframe.
How are 1099-K amounts calculated?
For third-party processors like PayPal, the 1099-K reports:
- Gross payment volume – The total dollar amount of payments received, without any deductions or fees.
- Gross amount of total reportable transactions – Total number of payment transactions.
- Card payments – Total amount of credit/debit card payments only.
- Third party network payments – Total amount of third-party network payments like PayPal, Venmo, etc.
The gross amounts reflect the total payments before any fees, refunds or deductions are applied by the processor. Your actual income may be lower.
Do I report the full 1099-K amount on my taxes?
No, you do not report the full gross amounts from 1099-K on your tax return. The 1099-K shows gross payment volume before fees, refunds, chargebacks, etc are deducted by the payment processor.
You need to reconcile the 1099-K amounts with your accounting records or merchant statements to find your net, taxable income. Some deductions can include:
- Payment processing fees
- Refunds issued to customers
- Chargebacks
- Returns
- Disputes
- Reserves held by the payment processor
- Other business expenses
Work with your accountant or tax software to accurately calculate your net business income using your 1099-K, accounting records, and other supporting documents.
Do I need to report a 1099-K if I lost money?
Yes, you still need to report your 1099-K even if your business lost money for the year. A 1099-K does not distinguish between profit and losses – it simply reports gross payment volume received.
You must reconcile the 1099-K with your accounting records and other documents to determine your net profit or loss for tax purposes. Report the final amount accurately on your Schedule C or other business tax form.
What if I never got a 1099-K but I received payments?
If you did not get a 1099-K but you know you received credit, debit or third-party payments over $20,000 for your business, you still must report that income on your tax return.
The IRS requires you to report all taxable income even if you did not get a 1099-K. Do not assume the income is untaxable just because you did not get the reporting form.
To estimate your unreported payments, check your accounting records, merchant statements, PayPal reports, Stripe dashboard etc. Document the payment volume to claim deductions and determine your net taxable income.
What payments are not included on the 1099-K?
Some types of transactions are exempt from 1099-K reporting. Payments not included are:
- Personal transfers through PayPal Friends and Family, Venmo, etc.
- PayPal payments sent to you from sales platforms like eBay, Etsy, etc.
- Checks and cash payments
- Cryptocurrency exchanges and trades
- International payment transactions
These payments may still be taxable income if related to a business. Report them correctly even without a 1099-K.
How do I get a copy of a missing or lost 1099-K?
If you have not received your 1099-K or lost it, follow these steps to get a replacement copy:
- Check your inbox – Many 1099-Ks are sent digitally via email or portal.
- Contact the payment processor and request a duplicate 1099-K. There may be a small fee.
- Check your account portal if available – Many processors let you access and print tax forms.
- File IRS Form 4506-T to request a transcript of previously filed tax returns which would include reported 1099-K amounts.
You need the correct 1099-K information for filing an accurate tax return, so get a replacement as soon as possible.
Should I attach 1099-K with my tax return?
No, you should not attach 1099-Ks to your filed tax return. Here’s what to do instead:
- Keep it for your records – Retain 1099-K for at least 3 years along with your tax documents.
- Enter data correctly on your return – Use 1099-K to report your income accurately on your tax forms.
- Provide if requested – Have it available in case the IRS requests proof or verification.
The IRS receives its own copies of all 1099-Ks directly from payers. Do not attach your copy to the return unless specifically instructed to.
Can I get in trouble if I do not report a 1099-K?
Yes, there can be serious consequences if you fail to report income documented on a 1099-K. Potential penalties include:
- Additional tax owed on unreported income
- Interest charges on unpaid tax
- Accuracy penalties up to 20% of unpaid tax
- Perjury charges for falsifying tax returns
- Criminal prosecution for tax evasion
It is critical to report all 1099-K income. The IRS matches information returns like 1099-Ks to amounts reported on tax returns. Failing to report leads to automatic red flags.
Can I deduct business expenses on my 1099-K income?
Yes, you can claim eligible business deductions and expenses on income reported on a 1099-K, just like with other business income.
Common deductions include:
- Cost of goods sold
- Equipment, supplies
- Advertising costs
- Transaction and processing fees
- Professional services
- Rent, utilities for business property
- Home office deduction
- Business travel
- Vehicle, mileage, and transportation costs
- Meals and entertainment (subject to limits)
- Employee expenses
- Loan interest
- Insurance costs
Proper documentation is required to claim business deductions. Track expenses, keep receipts, invoice payments, and reconcile with 1099-K amounts.
How do I report 1099-K income on my taxes?
Follow these key steps to report 1099-K payment transactions on your tax return correctly:
- Reconcile amounts – Match 1099-K to your accounting records to determine your net income.
- Choose the right form – Report on Schedule C for sole proprietorship or Partnership/LLC return.
- Enter on correct lines – Use the lines for gross receipts/sales and returns/allowances.
- Claim deductions – Deduct related allowable business expenses.
- Retain documentation – Keep 1099-K and supporting records with your tax files.
Reporting can be complex for payment processors like PayPal that handle multiple transaction types across eBay, websites, etc. Consider engaging a tax professional.
Should I report a 1099-K for a hobby instead of a business?
If your activities are considered a hobby instead of a for-profit business, you would not report the 1099-K income on Schedule C. Instead, here is how to report it:
- On Form 1040 Line 1, report any income from payment transactions related to your hobby sales.
- You can deduct hobby expenses up to the amount of hobby income reported.
- Excess hobby expenses cannot be deducted against other income.
The IRS considers an activity a hobby instead of a business if:
- You did not conduct it in a professional manner.
- You did not depend on income for your livelihood.
- You incurred losses over an extended period of time.
Check with your tax advisor whether your activities qualify more as hobby or business.
Can I get audited for unreported 1099-K income?
Yes, failing to report your 1099-K income can increase your chances of being audited by the IRS. When you omit income reported on information returns, it raises red flags due to the mismatch.
Some scenarios that may trigger an IRS audit include:
- Not reporting your 1099-K at all
- Significantly underreporting 1099-K amounts
- Claiming the full gross amounts without reconciling for fees or deductions
- Claiming personal deductions against 1099-K business income
To avoid audit risk, thoroughly reconcile your 1099-K with business records and report the proper net income on your tax return. Retain documentation in case of IRS questions.
How far back can the IRS audit 1099-K reporting?
The IRS can go back up to 3 years to audit 1099-K reporting and income. In some cases, they can go back further if they find substantial underreporting of income. The statute of limitations extends to 6 years in that case.
To be safe, you should have records to support 1099-K amounts for at least the last 6 tax years. The IRS can question discrepancies found that indicate you underreported your business income.
What if I made an error reporting 1099-K income?
If you discover you made a mistake reporting your 1099-K income, take corrective action right away including:
- Amend your previous tax return – File Form 1040X to correct your income, deductions, tax owed etc.
- Pay additional tax immediately – Minimize interest and penalties.
- Adjust current year reporting – Claim amounts on this year’s taxes if already paid.
- Contact the IRS – Voluntary disclosure may reduce penalties.
The sooner you fix any 1099-K reporting errors, the better. Leaving mistakes unaddressed gives the impression you intended to evade taxes.
Can I deduct my 1099-K payment processing fees?
Yes, you can deduct the fees charged by payment processors like PayPal, Stripe and Square to accept credit cards and electronic payments for your business.
These include fees like:
- Transaction fees per sale
- Credit card processing percentage
- Monthly service fees
- Statement fees
- Chargeback fees
- Currency conversion fees
Be sure to reconcile your total processing fees for the year with your 1099-K amounts. The IRS may flag large discrepancies.
Should I set up a separate business account to receive 1099-K payments?
Yes, it is smart business practice to establish a dedicated bank account just for receiving income from payment processors and transactions reported on your 1099-K.
Keeping it separate from your personal finances makes accounting and taxes easier. Benefits include:
- Easier to track income and expenses
- Clean documentation for claiming deductions
- Simplified reconciliation of 1099-K amounts
- Better separation for legal and tax purposes
Choose a free business checking account and only use it for receiving client payments and paying business expenses.
How can I reduce my 1099-K taxable income?
Some tips to lower the taxable income from your 1099-K payment reporting include:
- Reinvest in your business – Spend on deductible expenses like equipment, supplies, services etc.
- Use retirement accounts – Contribute to SEP IRA or Solo 401k to defer tax.
- Claim the QBI deduction – If qualified, deduct up to 20% of net business income.
- Implement an entity – File taxes as S-Corp or LLC to gain deductions.
- Hire family – Pay reasonable wages to spouse and children.
- Be diligent with records – Track income and deductions closely.
Discuss more ways to reduce your 1099-K tax liability with a trusted tax professional.
Conclusion
It is important to properly report any 1099-K amounts you receive for your business. Be sure to reconcile payment volume with your accounting records to find your correct net, taxable income. Claim all eligible deductions related to your business activity.
Tax rules for 1099-K income can be complex. Work with a knowledgeable tax preparer or CPA if you need help. File an accurate return on time to avoid penalties from the IRS.