Are 1099-K Forms Reported to the IRS?
Gain clarity on how Form 1099-K connects your payment platform activity to the IRS and what it means for reporting your actual taxable income.
Form 1099-K, Payment Card and Third Party Network Transactions, is an informational document used to report payments for goods or services received through electronic methods. These methods include transactions via credit or debit cards and payments made through third-party settlement organizations like PayPal, Venmo, and Stripe. This form summarizes the gross amount of these payments made to an individual or business during the calendar year.
The Reporting Process to the IRS
Payment Settlement Entities (PSEs), which encompass credit card companies and third-party payment networks, send Form 1099-K to both the payment recipient and the Internal Revenue Service (IRS). The deadline for a PSE to furnish the form to the payee is January 31st of the year following the transactions. A copy is filed with the IRS, providing the agency with a record of the gross payments.
This reporting creates a third-party information trail that the IRS uses for verification. The agency cross-references the amounts on Forms 1099-K with the income reported on taxpayers’ returns to identify potential discrepancies. The form’s function is to increase tax compliance and improve the accuracy of reported income from these sources.
Reporting Thresholds for Receiving a Form 1099-K
The rules for receiving a Form 1099-K have been changing. For many years, the federal requirement for third-party networks was triggered by more than 200 transactions and over $20,000 in gross payments. Legislation lowered this threshold to a flat $600 with no minimum transaction count.
However, the IRS has delayed the implementation of this lower $600 threshold. For the 2024 tax year, a transitional threshold of $5,000 has been established. This means you will receive a Form 1099-K for 2024 if your gross payments for goods and services exceed $5,000. The IRS plans to reduce this threshold to $2,500 for the 2025 tax year, with the $600 threshold scheduled to take effect in 2026.
These are federal thresholds, and some states have implemented their own, often lower, reporting requirements. Because of these variations, a taxpayer might receive a Form 1099-K for state tax purposes even if their payment volume does not meet the federal threshold for that year. It is important to be aware of your specific state’s tax regulations.
Understanding the Information on Your Form 1099-K
When you receive a Form 1099-K, the figure in Box 1a is the “Gross amount of payment card/third-party network transactions.” This number represents the total dollar amount of all reportable payment transactions. It is a gross figure, calculated before the deduction of any fees, commissions, shipping costs, or refunds, which is why the amount may be higher than the funds deposited into your bank account.
The form also contains other identifying information. You will find the name, address, and telephone number of the Payment Settlement Entity that filed the form. It also includes your name, address, and Taxpayer Identification Number (TIN). The form also includes a merchant category code (MCC) to classify the business.
How to Use Form 1099-K for Your Tax Return
Upon receiving a Form 1099-K, you should reconcile the gross amount in Box 1a with your own business records. For sole proprietors and freelancers, this gross amount should be reported as income on Schedule C (Form 1040), Profit or Loss from Business. It is important to report the full amount from Box 1a.
After reporting the gross income, you can then deduct all your ordinary and necessary business expenses on the same Schedule C. These deductions reduce your gross income to your net taxable income. Eligible expenses include processing fees, the cost of goods sold, shipping expenses, marketing costs, supplies, and refunds you issued. Accurate record-keeping throughout the year is important for this step.
Sometimes, a Form 1099-K may include non-taxable transactions, such as personal cash gifts or reimbursements for shared expenses. Since the form reports gross transactions for goods and services, these personal payments can be included. If this occurs, you should still report the full Box 1a amount on your Schedule C and then include an offsetting entry in the expenses section to subtract the non-taxable amount.