Form 1099-K: What U.S. Small Business Owners Need to Know
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If you accept credit card payments or payments through a third-party network, you’ll want to pay attention to the 1099-K.
There are a lot of tax forms to keep track of: W-2s, 1098s and a number of different 1099 forms, including the 1099-K.
1099 forms are informational forms that report income from sources other than wages, salaries and tips. As a small business owner, you may get a number of these, like 1099-MISC for services you’ve performed or 1099-INT for interest earned on your bank account.
If you accepted credit card payments or received payments through a third-party network (like PayPal), add another 1099 form to the list of forms you can expect to receive: a 1099-K. And you’ll want to be sure that what you receive is right to avoid over or underpaying your taxes.
Here’s what you need to know about receiving a 1099-K.
What Is a 1099-K?
Form 1099-K is a document that the IRS requires payment settlement entities (PSEs) to send to report credit card payments and third-party network transactions. It’s the newest addition to the listing of 1099 forms—it was first introduced for tax years starting in 2011.
The 1099-K will include the gross amount of all payments from a PSE.
Who Receives a 1009-K?
If you received credit card payments and third-party network transactions, you’ll likely get a 1099-K. You should receive a 1099-K by the January 31 filing deadline if you received payments:
- From card transactions
- In settlement of third-party payment transactions, if the total was over $20,000 and you had more than 200 transactions
For example, if you own an online store and were paid via PayPal or through credit card transactions, you’ll want to keep an eye out for a 1099-K from each payment processor.
What Information Is Included on Your 1099-K?
Your 1099-K has a few pieces of very important information on it:
- Your taxpayer identification number (TIN), which is either your social security number or your employer identification number
- The gross amount of payments you received from the PSE sending you the form
- Your merchant category code (MCC), a four-digit number used to classify your business goods or services
- Your contact information, including your address and phone number
What Should You Do with Your 1099-K?
Like with all tax forms, you’ll want to take the time to ensure all of the information reported is correct.
Compare the total amount of payments that they reported with your credit card records and merchant statements. Ensure the amount they are reporting matches your records, because this is what they’ve reported to the IRS. If you find any errors, notify the sender immediately.
You’ll also want to check that they’ve included the correct TIN and merchant category code on the form.
Once you’ve ensured that the 1099-K is accurate and you’ve reflected this income correctly on your tax return, keep a copy of it with your tax records.
If you’re self-employed, the income that is reflected on your 1099-K is reported on your Schedule C. Just like with your 1099-MISC, if you’ve been keeping accurate books, this income received should already be included in your records. You won’t need to add the amount from the 1099-K to your reported income—doing so would cause you to double count your income. Just ensure it’s been properly recorded as income on your tax return.
What If the Amount on Your 1099-K Doesn’t Match Your Records?
If you receive a 1099-K and the number they’ve reported as gross payments doesn’t match your records, first ensure you’re looking at the right amounts. The 1099-K is reported in gross amounts, but your monthly statements might be reported in net amounts. Ensure you’re looking at the correct total.
If you still believe there is an error on your 1099-K, you should contact the PSE that is listed on the form. They can help you investigate the difference. Keep all of your records as documentation of the discrepancy.
What If You Don’t Receive a 1099-K?
If you think you should have received a 1099-K but didn’t, reach out to the company that should have issued it. They may have sent it to the wrong address or have incorrect information about the payments you received.
Regardless of whether you receive a 1099-K or not, all income that you receive should be reported on your tax return. That’s why it’s important to keep track of payments you receive using an accounting solution, like FreshBooks.
How Is a 1099-K Different from a 1099-Misc?
The differences between a 1099-K and a 1099-MISC can be confusing. Both report income you received.
Your 1099-MISC form will show how much you received from services, prizes and awards, rents and other income payments.
Your 1099-K form will show how much you received from credit card payments and third-party network transactions.
The deciding factor in whether you’ll receive a 1099-MISC or a 1099-K is how you received the income. If you received money via cash, check or an ACH deposit, you’ll likely receive a 1099-MISC. If you received the money from a third-party network (like PayPal) or a credit card, you’ll receive one if you meet the reporting criteria.
Payments made to you using credit cards or third-party network transactions won’t be reported on your 1099-MISC, but instead on your 1099-K.
As a Business Owner Do You Need to Send a 1099-K?
In short, no, you don’t need to send a 1099-K to someone you’ve paid by credit card or third-party network. The credit card company or third-party network is responsible for sending it.
Note, if a PSE doesn’t send a 1099-K, the penalty the IRS charges them can be large. The penalties for not filing a one range from $30 to a maximum of $3,339,000.
Should You Send a 1099-MISC Instead?
As a business owner, you’ll send a 1099-MISC in many situations where you pay someone more than $600. Let’s say you hire a freelancer to design a new website for you and they charged $2,500. Whether you send a 1099-MISC to them depends on how you paid them. If you sent them a check, you’ll be required to send them a 1099-MISC.
But what if you paid them using a credit card?
Because you paid with a credit card, you won’t send them a 1099-MISC, even though you’ve paid them over the $600 reporting threshold. And you won’t send them a 1099-K. Instead, the PSE is required to send them a 1099-K to report the payments they received from a credit card transaction.
Even though you made the payment, the PSE is required to send the 1099-K.
If you need help figuring out who needs to receive a 1099-MISC, you should work with a tax professional to make sure you get it right.
Bottom Line
As a business owner, you might receive a 1099-K in your business. It’s important to know why you’re receiving this form and to double-check that the information matches your records. This is the income information that your PSE reports to the IRS, so getting it right is important.
This post was updated in February 2020.
about the author
Freelance Contributor
Erica Gellerman is a CPA, MBA, content marketing writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, and more. She currently lives in Hawaii.
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