Form 1099-K: A Comprehensive Guide
These days, people are finding unique ways to make money. Thanks to technology, opening up a business from home or making extra money as a side hustle is easier than ever. The gig economy is booming and shows no signs of slowing down. As a result, more people earn an income outside standard nine-to-five jobs. While that benefits individuals and small businesses, it can create confusion when tax season rolls around.
If you're a small business owner or part of a large enterprise operation, you may work with people who aren't official employees. For example, you might hire contractors worldwide to complete projects for your company. Alternatively, you could have an online marketplace full of sellers or a flourishing team of freelancers. Whatever the case, the individuals receiving payments from your business aren't employees. Therefore, the tax situation is more complex.
That's where the 1099-K form comes in. IRS Form 1099-K is nothing new. However, recent changes to IRS rules and the ever-growing gig economy mean more people will receive it. So, what is Form 1099-K, and how does it affect your business and payout recipients?
Read on to learn more and ensure you comply with all your tax duties.
A Quick Definition
A 1099-K is an official Internal Revenue Service (IRS) form. Its full name is "Form 1099-K: Payment Card and Third Party Network Transactions."
The goal of Form 1099-K is to report payment transactions made through payment cards and third-party payment networks. The term "third-party payment network" can include banks or organizations that settle transactions for a merchant. It also includes payments through popular apps like Venmo, PayPal, CashApp, etc.
What is it Used For?
The point of Form 1099-K is to report an individual's income through gig platforms, marketplace sites and more. As gig work becomes more common, billions of dollars are going unreported. Employers reported income for employees, making it impossible for most people to avoid taxes. But because employers didn’t report income paid to contractors the same way, there was a lot of room for tax misrepresentation.
Form 1099-K aims to prevent that while giving taxpayers an easier way to report potential income. It provides more accountability for payment networks and gig work platforms like Uber. The form also helps to prevent individuals from "gaming the system," ensuring that individuals who work as contractors or small business owners pay their fair share in taxes.
These forms don't necessarily mean that recipients will need to pay taxes. It doesn't include any profit calculations or deductions. Instead, it serves as a comprehensive view of all transactions for the tax year.
A 1099-K includes the gross total of all reportable payment transactions made through a card or network. The payment card companies processing credit card payments, marketplaces, and apps that process payments, fill out form 1099-K with the IRS.
If you have a business that sends payouts regularly to contractors or sellers, you may have to provide the 1099-K form to the IRS and the people you pay. Think of your contractors as vendors providing a service. You pay those vendors for their work and process payments through a third-party settlement organization (TPSO). Whether through manual processing, or an automated API like Dots that allows you to send payouts through multiple rails, you must keep accurate records to report those transactions.
While many mistake them for the same thing, Form 1099-K and Form 1099-NEC (non-employee compensation) differ in many ways. Both are variants of the 1099 form. However, they focus on different aspects of your income.
Form 1099-NEC reports the income paid for your services regardless of how individuals receive their money. Typically, marketplace sites and gig platforms send a 1099-NEC when taxpayers earn more than $600 during the tax year. The 1099-NEC replaced the 1099-MISC for most people. However, Form 1099-MISC is to report miscellaneous income, so it also applies to contest-winners, royalties for intellectual property owners, members of a class-action lawsuit, etc.
Form 1099-K focuses on online business transactions and is primarily used by card companies and third-party processors to report the payments they process.
Who Gets This Document?
You'll get the 1099-K tax form if you accept online payments for products or services. The form typically doesn't apply to large companies, as they may be sending them. It's more for small businesses, freelancers,and sole proprietors.
A sole proprietor is a single person who owns a business and hasn't officially formed a business entity like a C-Corp or S-Corp. You don't have to do any paperwork to become a sole proprietor. That's where many people participating in the gig economy need clarification.
If you're selling products on a marketplace or providing a service to a larger company as an independent contractor, you're essentially running a sole proprietorship. Becoming a sole proprietor is automatic and begins when you start making money selling products or services. As a business that sends payouts to contractors and independent vendors, you may work with hundreds or thousands of sole proprietorships.
Of course, individuals don't get the 1099-K form for making only a few bucks. There's a threshold. The rules recently changed, but for the 2023 tax year, individuals will receive a 1099-K from payment processors and apps if they received gross payments over $20,000 and performed over 200 transactions.
Those who sell goods on marketplace websites will get Form 1099-K if they make gross sales over that threshold. Meanwhile, someone working as a freelancer delivering goods or working for a ridesharing platform will get the form if they get paid more than $20,000.
Changes in Recent Years
Form 1099-K is in the spotlight because of recent changes that the IRS ultimately delayed. In 2022, the IRS announced new rules surrounding Form 1099-K. Changes to tax laws are always confusing, and this one is no different. So what is the difference, and how does it affect you?
Essentially, the IRS changed the threshold for receiving a 1099-K, lowering it from $20,000 down to only $600. The new $600 threshold mirrors the requirements for a 1099-NEC or 1099-MISC.
This change responds to many online sellers and freelancers underreporting their income. In the past, people receiving 1099 forms could easily exploit loopholes to avoid reporting certain income. The change aims to eliminate the loophole to ensure more people accurately report their income and pay their fair share of taxes. The change is part of the American Rescue Plan of 2021.
But before you panic, the change doesn't go into effect until the 2023 tax year. You won't file for the prior calendar year until 2024, so it's not a concern yet.
Initially, the new $600 threshold would go into effect for the 2022 tax year. But in December 2022, the IRS delayed its implementation to give platforms and payment networks more time to adjust. It also offers the IRS more time to provide additional instructions and facilitate a smooth transition.
The good news is that, for the 2022 tax year, the old threshold of $20,000 and over 200 transactions applies. But you'll need to take steps to prepare for more paperwork for 2023.
Do I Have to Pay Taxes On It?
Receiving Form 1099-K doesn't always mean that you must pay taxes. Whether you pay taxes on Form 1099-K depends on your situation.
You'll likely have to pay taxes if you're a sole proprietor making considerable income as a contractor or marketplace seller. In those cases, the transactions reported on Form 1099-K are your income. Even if it comes from a side hustle, the IRS treats that money like any other income you make throughout the year.
That said, there may be situations when the transactions and gross total of payments you've made don't result in profit. You may also have transactions that aren't part of your business. For example, you might have hobby income or transactions that are nothing more than sending money to roommates to cover your rent. You may also have transactions from the sale of personal items.
There are many variables to consider, and it's a good idea to compare your records and review the form for tax liability. As a good rule of thumb, you'll pay taxes if you make a profit.
The good news is that you can deduct some of the expenses based on the payments on Form 1099-K. Business-related expenses like advertising, web hosting, merchant fees and even the costs to establish your home office can lower your taxable income.
How To Report 1099-K Income On Your Tax Return
Those who receive a 1099-K form will get it in the mail by the end of January. Businesses and processors who file Form 1099-K will generate two copies. One goes directly to the IRS, while the other goes to individuals who exceed the threshold. If you pay contractors, you may have to send 1099-K forms through your third-party settlement organizations.
Individuals who get Form 1099-K for IRS information return should review the included information. Compare it to your records for accuracy.
You'll need Schedule C and Schedule 1 to file the information on your taxes.
Contrary to popular belief, you must still report hobby income. Gross hobby income goes on Schedule 1 of Form 1040. You'll need to provide information about the issuer that sent the 1099-K form. That includes their name and Employer ID Number (EIN).
For business income, you'll look at Schedule C of Form 1040. The income you make as a sole proprietor, freelancer and independent contractor goes on line 1 of Schedule C. If you have any returns or allowance, it goes on line 2. You can also include the costs of goods sold and any available deductions associated with business expenses.
Simplify Your Payouts With the Dots API
The new tax laws surrounding Form 1099-K can be confusing, butut they don't have to be. If you're a business that processes payouts to multiple contractors, Dots can make tax reporting a breeze. Dots is a payout API that unifies payments, offering simplicity and efficiency. Automate how you move money and collect relevant tax information.
Built-in tax reporting features streamline the collection and organization of data, allowing your business to generate all the necessary forms to fulfill tax duties. That includes 1099-K, 1099-NEC and more. Check out Dots today and schedule your free demo to learn more.