With numerous forms and deadlines to meet during tax season, it’s essential to understand the purpose of each document, including the 1099-K. This IRS form records payment card and third-party network transactions, and plays a vital role in your business’s financial reporting. It’s especially crucial to understand this form if you’re a sole proprietor, as it directly impacts taxes owed on reportable income.
Who Receives a 1099-K?
Previously, those that processed payment card or third-party network transactions had to receive a 1099-K if they processed more than 200 transactions through payment cards or other third-party networks in a tax year and had total receipts exceeding $20,000.
However, the IRS implemented new, lower reporting thresholds for tax year 2023, so small business owners and self-employed professionals will be more likely to receive 1099-Ks than they previously were.
As of tax year 2023, you will receive Form 1099-K if you process payment card or third-party network transactions and have total receipts of more than $600. Transactions include both online and in-store sales completed through credit cards and other eligible means like PayPal. It no longer matters how many transactions you processed. Crossing the $600 threshold means you owe taxes on the income, which the 1099-K reports.
This change is significant, so take steps to comply:
- Carefully track all third-party payments. Every transaction is reportable.
- Closely review your tax return to confirm you included all income.
- Speak to a tax professional if you have questions. Don’t leave room for uncertainty.
When You Should Get It
If you qualify to receive a 1099-K, expect it to arrive by January 31 of the year following the tax year it applies to. For example, you should receive the 1099-K form for tax year 2023 by January 31, 2024.
The IRS gets a copy too, so they can cross-check your reported income. If you think you should have received a 1099-K but it’s after January 31, you may want to contact your processor to see if they sent one to the IRS. Even if they didn’t send you a 1099-K, you must fully report all taxable transactions as part of your income.
What’s Included on a 1099-K
When filed correctly, the 1099-K form includes:
- Payee identification: You or your company’s name and address.
- Gross amount paid: Total gross payments. Remember that these figures represent gross sales rather than net profit. It does not account for refunds or discounts offered by businesses when calculating taxable income. Don’t overlook these numbers when filling out your primary tax form.
- Merchant Category Code (MCC): The code your credit card company assigned based on your goods/services. If you’re uncertain about yours, various tools online can help identify them accurately.
- Filing status: Indicates if you crossed the reporting thresholds for transactions and receipts.
Sometimes the 1099-K you receive may not accurately report the total gross payments. If your 1099-K seems wrong, start by comparing it to your own records. If they don’t match, contact the issuer to request a corrected 1099-K. Their contact information is on the form.
Be aware of these common mistakes and reasons they happen:
- The form may your personal name instead of your business entity’s name when you report income as a business
- If you shared a credit card terminal, transaction data may be mixed up with theirs
- If you bought or sold your business, or changed business structure mid-year, payments could be reported to the wrong entity
- The merchant category code (MCC) may not fit your company’s description
Reporting and Filing
As mentioned previously, Form 1099-K reports gross payment card and third-party network transactions. If you meet reporting thresholds for the tax year, you’ll get one of these forms from each processor you interacted with.
Credis, fees and refunds are often excluded in the gross amounts reported, so carefully report all your actual business earnings–cash, checks, tips, discounts, everything–even if you don’t get a 1099-K.
Once you’ve ensured you have your full income total, including that reported on 1099-Ks, you can file your business return. Use Form 1120, 1120-S or 1065 for corporations and partnerships, or Form 1040, Schedule C for sole proprietors.
Penalties for Incorrect Reporting
The IRS cross-checks 1099-K figures against your reported income. Understating your totals can lead to penalties of up to 20% of unreported income, in addition to interest.
Let Paro Guide You Through Tax Season
Navigating complex reporting requirements and ensuring you’ve captured all your income can be tricky, but Paro’s expert tax professionals are here to help. Our tailored tax advisory and filing services provide reliable guidance so you can breeze through tax season.