Do I Have to Pay Taxes If I Use Square?

Whether you use Square to process payments for a business or for casual sales, understanding your tax obligations is important. Square, like other third-party payment processors, facilitates financial transactions but does not remove the user’s responsibility for reporting income to tax authorities. All income, regardless of how it is received, is generally subject to taxation by the Internal Revenue Service (IRS).

Taxability of Payments Received Through Square

Income earned from selling goods, providing services, or engaging in gig work is considered taxable by the IRS. This applies whether payment comes from cash, check, or digital platforms like Square. Square facilitates payments, enabling businesses and individuals to accept various forms of payment, including credit and debit cards. The method of payment collection does not change the taxability of the underlying income.

Understanding the difference between gross income and net income is important for tax purposes. Gross income includes all earnings before any deductions or expenses are considered. Net income is the amount remaining after subtracting eligible business expenses from gross income. This net figure is typically used to calculate tax liability.

Understanding Form 1099-K and Reporting Thresholds

Form 1099-K is an informational tax document issued by payment settlement entities, such as Square, to report the gross volume of payment transactions to the IRS and to the payee. This form is intended to help the IRS identify potential taxable income from payment card and third-party network transactions. Receiving a 1099-K does not automatically mean all the reported income is taxable, as it includes gross payments and not necessarily net profits.

The federal reporting thresholds for Form 1099-K have experienced changes over time. Historically, the threshold was $20,000 in gross payments and more than 200 transactions. The American Rescue Plan Act of 2021 initially aimed to lower this to $600 with no transaction minimum, set to take effect for the 2023 tax year. However, the IRS delayed this implementation.

For the 2024 tax year, the IRS set a transitional threshold of $5,000 in gross payments, with no transaction count requirement. For the 2025 tax year, recent legislation, the One Big Beautiful Bill Act, has reinstated the original threshold of $20,000 in gross payments and 200 transactions for Form 1099-K reporting. Even if you do not receive a Form 1099-K, you are still obligated to report all your income to the IRS. Some states may also have different or lower 1099-K reporting thresholds than the federal standard.

Key Tax Obligations for Square Users

Many individuals using Square are considered self-employed, operating as sole proprietors or independent contractors. This designation carries specific tax obligations beyond standard income tax. Self-employment tax covers Social Security and Medicare taxes for individuals who work for themselves. The self-employment tax rate is generally 15.3%, consisting of 12.4% for Social Security on earnings up to an annual limit ($176,100 for 2025) and 2.9% for Medicare on all net earnings. Self-employed individuals are responsible for both the employer and employee portions of these taxes, unlike traditional employees whose employers pay half.

Individuals who expect to owe at least $1,000 in taxes for the year, including income tax and self-employment tax, generally need to pay estimated taxes quarterly. This ensures taxes are paid as income is earned throughout the year, rather than as a single lump sum at the tax deadline. Estimated tax payments are due on April 15, June 15, September 15, and January 15 of the following year. Failing to pay enough tax through withholding or estimated payments can result in penalties.

Business expenses can reduce your taxable income and, consequently, your tax liability. For Square users, this includes the processing fees charged by Square for transactions. Other common deductible business expenses include supplies, equipment purchases, advertising costs, and home office expenses if a dedicated space is used regularly and exclusively for business. Keeping detailed records of all income and expenses is important to accurately calculate your net earnings and claim eligible deductions.

Essential Record Keeping and Other Tax Considerations

Maintaining accurate and organized financial records is important for all individuals earning income, particularly for those using platforms like Square. These records should include all income received, regardless of whether a Form 1099-K was issued, and detailed documentation of all business expenses. Examples of records include Square reports, bank statements, and receipts for all purchases related to your business. This record-keeping supports accurate tax reporting and provides necessary documentation in case of an IRS inquiry.

Sales tax is a distinct obligation separate from income tax and self-employment tax. If you sell tangible goods or certain services, you may be responsible for collecting sales tax from your customers and remitting it to the appropriate state and local tax authorities. Sales tax rates and rules vary significantly by jurisdiction, and sellers need to register with their state’s department of revenue to obtain a sales tax permit. While Square may offer tools to assist with sales tax collection, the ultimate responsibility for compliance lies with the seller.

Given the complexities of tax laws and the varying circumstances of individuals and businesses, consulting with a qualified tax professional is advisable. A tax professional can provide personalized advice tailored to your specific financial situation. This guidance can help ensure compliance with all applicable tax laws, optimize deductions, and avoid potential penalties.