What Is a Form 1099-K Primarily Used For?

Form 1099-K, “Payment Card and Third Party Network Transactions,” is an informational document the Internal Revenue Service (IRS) uses to track payments and enhance tax compliance. It is not a bill, but a report of the gross value of transactions processed for a recipient by a payment settlement entity within a calendar year. The form provides a third-party record of payments from credit cards, debit cards, and third-party networks, helping both taxpayers and the IRS ensure that income is reported accurately. Its issuance is part of the IRS’s strategy to increase visibility into electronic financial transactions.

Who Receives a Form 1099-K

A Form 1099-K is issued by a Payment Settlement Entity (PSE), which is a company that facilitates payments between parties. Common PSEs include third-party network organizations like PayPal, Venmo, and Square, as well as merchant acquirers that process card payments for businesses. These entities are required to send the form to the recipient of the payments and the IRS.

The federal requirement for when a PSE must issue a Form 1099-K has been subject to recent changes. For the 2024 tax year, the IRS has set the reporting threshold at amounts over $5,000. This is a significant change from the previous threshold of $20,000 in gross payments and more than 200 transactions.

The IRS is implementing this $5,000 threshold as a transitional step. A planned reduction to a $600 threshold, which was part of the American Rescue Plan Act of 2021, has been further delayed to give taxpayers, tax professionals, and payment processors more time to prepare.

Federal rules do not preempt state-level requirements, and a number of states have established their own, lower reporting thresholds. For instance, some states mandate the issuance of a 1099-K for gross payments as low as $600. Because of these varying state laws, a taxpayer might receive a Form 1099-K even if their transaction volume falls below federal requirements.

Understanding the Information on Your Form 1099-K

The most prominent figure is found in Box 1a, “Gross amount of payment card/third party network transactions.” This number represents the total dollar amount of all payment transactions processed for you by the PSE during the calendar year, without any deductions.

A frequent point of confusion is that the Box 1a amount is a gross figure. It does not account for any adjustments, such as refunds issued to customers, shipping fees, or the cost of goods sold. The figure also includes any processing fees charged by the PSE, so the amount shown is not your net profit.

The Filer’s information identifies the PSE that issued the form. Box 5 breaks down the gross transaction amount by each month of the calendar year. This monthly breakdown is a useful tool for reconciling the reported income with your own financial records and identifying discrepancies.

If you find that the information on your Form 1099-K is incorrect, or if it includes non-taxable personal transactions like gifts, you should not ignore it. The IRS receives a copy of this form, and a mismatch between what is reported and what you file can trigger inquiries.

The first step is to contact the PSE that issued the form to request a correction. The PSE is responsible for the accuracy of the form and is the only party that can issue a corrected 1099-K.

How to Report Form 1099-K Income on Your Tax Return

For most self-employed individuals, including sole proprietors, freelancers, and single-member LLCs, this income is reported on Schedule C, “Profit or Loss from Business.” The gross amount from Box 1a of the 1099-K should be included in the figure reported on Line 1, “Gross receipts or sales,” of Schedule C.

On Schedule C, you will subtract your business expenses from your gross receipts. This is where you account for the costs that were not reflected in the 1099-K’s gross figure. These deductible expenses can include the cost of goods sold, returns, credit card processing fees, supplies, and advertising.

The result of this calculation is your net profit or loss, which is the amount subject to income and self-employment taxes.

While Schedule C is the most common place to report this income, the appropriate form depends on the nature of the underlying activity. For example, if the payments were for renting out property, the income is reported on Schedule E, “Supplemental Income and Loss.” Similarly, income from farming activities would be reported on Schedule F.

For businesses structured as corporations or partnerships, the reporting is different. A C corporation reports the income on Form 1120, “U.S. Corporation Income Tax Return,” while an S corporation uses Form 1120-S. Partnerships report their income on Form 1065, “U.S. Return of Partnership Income.”