A 1099-K is a tax form used to report payment transactions made to you for goods or services through third party payment networks. This includes payment processors like PayPal, Venmo, and Stripe. If you received payments through these platforms that total over $600 for the year, you should receive a 1099-K detailing those transactions. So what happens if you don’t report the income from a 1099-K on your taxes?
Do I need to report 1099-K income?
Yes, you are required to report all income received as detailed on a 1099-K. The IRS receives a copy of the 1099-K as well, so they will know if you got one and didn’t report it. The 1099-K is an information return used to report payment transactions made through third party settlement organizations.
Some key things to know about 1099-Ks:
- You should receive a 1099-K if you received payments for goods or services that exceeded $600 across all accounts through a third party payment network.
- Common third party payment networks that issue 1099-Ks include PayPal, Venmo, Square, Stripe, eBay, and others.
- The 1099-K will detail the gross payments received through that payment network.
- These payment amounts need to be reported as income on your tax return.
So in short, yes you do need to report all 1099-K income. The IRS considers this taxable income that needs to be reported.
What if I don’t get a 1099-K?
Just because you didn’t receive a 1099-K does not mean you don’t have to report the income. The 1099-K reporting requirement is $600 in gross transactions across all accounts on third party platforms. So if you did not meet that threshold, the payment network is not required to send you or the IRS a 1099-K.
However, you are still required to report all income earned, even if you did not receive a 1099-K. The IRS does not have documentation of payments less than $600, so it is up to you to accurately report your earnings.
Are there penalties for not reporting 1099-K income?
Yes, there can be both civil and criminal penalties for not reporting 1099-K income if you fail to disclose it on your tax return. The penalties can vary based on the circumstances.
Some potential penalties for not reporting 1099-K income include:
- Civil penalties – These are usually a percentage of the unpaid tax and can range from 20% to 75% of the unpaid tax. Interest will also accrue on the unpaid balance.
- Criminal penalties – More serious penalties like felony fraud charges and jail time can apply in cases of deliberate tax evasion. This would involve intentionally not reporting significant 1099-K income.
- Accuracy-related penalties – This can be 20% of the underpaid amount for negligence or disregard of tax rules.
- Late filing penalties – If you do not file your return on time, or fail to properly extend, late filing penalties apply.
The civil penalties and interest are usually the most common consequence. The IRS will send you a bill detailing what you owe. Criminal charges are rare and usually reserved for repeat offenders or those intentionally committing fraud in not reporting large amounts of 1099-K income.
What if I forget to report a 1099-K?
Mistakes happen, and you may simply forget to include a 1099-K or report some associated income on your tax return. If this was an honest mistake, it’s best to file an amended return as soon as possible.
Follow these steps to correct a failure to report 1099-K income:
- File Form 1040X to amend your tax return for the year unreported income was received
- Pay any additional tax owed based on the updated return
- File amended state tax return if additional state tax is due
- Submit a statement explaining you inadvertently omitted the income
This will show the IRS it was an honest mistake and you are voluntarily correcting it upon realization. This can help avoid penalties or reduce them significantly. Interest may still accrue until the balance is paid off.
When are 1099-Ks issued?
1099-Ks are issued annually by January 31st for the preceding tax year. So the 1099-K you receive in January 2023 will be for payment transactions made in 2022 through third party networks.
Key dates for 1099-Ks:
- January 31 – Deadline for payment networks to issue 1099-Ks to payees
- February 15 – Copies of 1099-Ks must be submitted to the IRS by third party payers
- April 15 – 1099-K income must be reported on your tax return
You need to reconcile your own records with the 1099-K amounts reported and include that income on your annual tax return.
How does the IRS know if I don’t report 1099-K income?
The IRS receives copies of all 1099-Ks issued by the third party payment networks. So they have documentation of any 1099-K income you received.
When you file your return, they will match up the income reported on your return to the 1099-K information they have on file. Any discrepancies or unreported income will get flagged for follow up.
They will send you a notice inquiring about the unreported 1099-K income. If you fail to respond or cannot prove you reported the income, they will assess additional tax, interest, and potential penalties based on the amounts shown on the 1099-K.
Can I deduct business expenses from 1099-K income?
Many taxpayers receive 1099-K income from selling products or services through third party processors. This income may be tied to a business you operate. If that is the case, you can deduct valid business expenses.
Expenses that can be deducted against 1099-K business income include:
- Inventory costs
- Packaging and shipping
- Transaction fees
- Equipment and supplies
- Advertising
- Home office expenses (if applicable)
- Business travel
- Salaries and wages
- Health insurance for employees
Be sure to keep thorough records of all business-related expenses. Having evidence to support your deductions is key.
If the 1099-K income is tied to a hobby instead of a formal business, your ability to deduct expenses is limited. Make sure you understand the tax classification of your activities generating the 1099-K income.
Tracking deductions from 1099-K income
Since most 1099-K income flows through third party platforms, you won’t receive an official form documenting your expenses like you would with a W-2 job. It is up to you track business spending and maintain your own expense records.
Some tips for tracking 1099-K expenses:
- Use accounting software or spreadsheets to log transactions
- Save receipts for all business purchases
- Dedicate a credit or debit card solely for business spending
- Set up a separate business bank account
- Review bank and credit card statements for business expenses
Taking these steps makes it easier to identify, organize, and prepare your expense records at tax time. Detailed records help support and prove the deductions you claim against your 1099-K income.
How do I report 1099-K income?
You need to report any 1099-K income you receive on your Schedule C along with your other business income and expenses. The 1099-K amount gets recorded as gross receipts or sales.
Key steps for reporting 1099-K income:
- Record the full amount from Box 1 of your 1099-K as gross receipts on Schedule C, line 1
- Claim all applicable business expense deductions
- Any net income then flows through to your 1040 where it is subject to self-employment tax
Make sure your 1099-K income also flows through to the appropriate state tax return as well. Failing to report it properly on federal and state can lead to penalties and interest from both tax agencies.
If you use accounting software, there is usually an easy way to import 1099-K amounts into the appropriate business income field. This can help automate populating your tax return with the correct amounts.
Sample 1099-K
Here is an example of what a 1099-K looks like and where to find the payment information that gets reported:
Payer Name: | Payment Platform XYZ |
Payer Tax ID: | 123456789 |
Recipient Tax ID: | 987654321 |
Box 1 – Gross payments: | $24,000 |
The $24,000 in Box 1 would get reported on Schedule C, line 1 as gross receipts when you file your tax return.
Should I report less than $600 in income without a 1099-K?
Technically you are required to report all income earned, even if no 1099-K was received because it was under the $600 reporting threshold. However, the risk of an audit or penalties is low if small amounts were unintentionally omitted.
It is unlikely the IRS would know about a few hundred dollars in unreported income without documentation. But intentionally leaving off 1099-K income over $600 shown on a form they have could certainly trigger action.
To avoid any issues, it is safest to try to report all income, even without receiving a tax form. Rounding up a little is better than being accused of underreporting. For larger amounts, follow the recommendation to file an amended return if anything was incorrectly left off originally.
Are there exceptions to reporting 1099-K income?
There are a few scenarios where you may not have to report 1099-K income:
- Personal transactions – If money received was from family, friends, or others for personal reasons, it would not count as taxable income.
- Reimbursements – Getting repaid for items you purchased for the business should not be reported again.
- Refunds – Refunds for returned items or canceled services should not be included as income.
- Business to business payments – Transactions between your own business and another company may not have to be reported again by you personally.
However, do make sure any exceptions actually apply to your situation. Consult a tax professional if you are uncertain before excluding any reported amounts.
Can I deduct my own payments to others for services or goods?
If you paid another business or contractor for services through a third party processor and received a 1099-K for those transactions, you may be able to deduct those payments as business expenses.
Examples would include:
- Paying a freelancer to design your company’s website
- Paying a shipping company to fulfill orders
- Paying a supplier for inventory
You would still have to report the full amount shown on your 1099-K as income. But you could categorize those types of payments as deductible business expenses elsewhere on your return to offset the income.
Proper documentation of the business purpose for those types of payments is recommended in case they are questioned by the IRS. For substantial amounts, having a formal service agreement in place is advised.
What if I made personal purchases or transfers?
Sometimes 1099-K forms encompass both business transactions and personal purchases or transfers between family and friends. PayPal, Venmo, and CashApp accounts are often used for a mix of both.
You do NOT need to report personal transactions as income. The key is being able to differentiate which transactions were business vs personal.
Tips for identifying personal transactions:
- Review sender/recipient names – payments from family likely personal
- Look at memo, notes, emojis – descriptions can indicate if personal
- Analyze timing – purchases on weekends/holidays often personal
- Check sender history – repeat non-business payments likely personal
- Account for known business expenses already
Isolate any transactions identified as personal and keep clear records. You may need to show evidence a transaction was personal if the deduction of that amount is challenged.
What if I comingled personal and business transactions?
Sometimes business owners make the mistake of mixing personal and business transactions in the same account linked to a 1099-K. This makes it much harder to accurately report income when the records are tangled.
If you comingled transactions, here are some tips:
- Try to reconstruct records and categorize transactions if possible
- Total known business expenses and deduct from 1099-K income
- If you can’t feasibly separate, report the full 1099-K amount as income
- Open a dedicated business account going forward to avoid commingling
Reporting the full amount and overpaying tax is better than underreporting if you truly cannot reliably extract the personal transactions. Lesson learned for keeping better records and separation of accounts going forward.
Should I disclose my 1099-K income if I’m audited?
Absolutely. If your tax return is selected for an audit, you should provide copies of all 1099 forms received, including 1099-Ks.
The IRS will already have copies of the 1099-Ks issued to you, so trying to conceal that income would not be wise. Failing to reveal 1099-K income you left off your original return during an audit could potentially trigger fraud charges.
If you legitimately did not receive a 1099-K but still earned over $600 that went unreported, disclose that to the auditor as soon as possible. Being upfront about unreported income and explaining it was an oversight can help mitigate potential penalties.
Having thorough documentation of reported income and expenses also helps the audit process go more smoothly. An auditor just wants to verify everything is correct according to tax laws.
Takeaways
Here are some key takeaways on what happens if you don’t report 1099-K income:
- You are required to report all 1099-K income – the IRS gets copies of the forms
- Penalties like fines and interest apply if income goes unreported and taxes unpaid
- If overlooked by mistake, file an amended return and pay tax immediately
- Keep detailed records to support income sources and justify deductions
- If audited, disclose unreported income and explain circumstances
While 1099-K reporting can seem complicated, taking these steps helps ensure you stay compliant, avoid penalties, and sleep better at tax time.