What Is a 1099-K Used For?
If you are a business owner, self-employed, doing extra gigs, selling personal items, or offering products and services that accept payments through credit and debit cards and third-party payment settlement organizations, Form 1099-K is a vital subject that you need to understand.
Form 1099-K provides the total amount of all payment transactions that you received from your work or business, and you may need to declare payments you get from credit card companies or other third-party processors on your 1099-K forms. This article will provide you with key information regarding a 1099-K to help you have a better understanding.
What Is Form 1099-K?
According to the Internal Revenue Service (IRS), Form 1099-K, Payment Card and Third-Party Network Transactions, is an IRS information return designed to record specific payment transactions to increase voluntary tax compliance. In other words, Form 1099-K contains payments you received from your customers or clients through third-party settlement organizations and debit and credit card transactions.
The American Rescue Plan of 2021 modified the reporting level for third-party settlement businesses, including payment applications and online third-party settlement organizations (TPSOs). For third-party network transactions, the minimum transaction reporting criteria for a 1099-K have been lowered from $20,000 plus 200 transactions in years before 2023 to $600 without considering the number of transactions in years 2023 and beyond. Here are some popular third-party settlement organizations included for a 1099-K:
PayPal
Venmo
Square
Stripe
Cash App
Due to the change in the reporting threshold, more freelancers, independent contractors, workers, and business owners will presumably receive 1099-K forms this year than in years past.
Who Receives a 1099-K?
Business owners, retailers, independent contractors, and anyone who accepts online credit card payments and other forms of electronic payments from clients and customers will receive a 1099-K if they had commercial transactions totaling more than $600 through payment apps and card payments. The third-party payment transaction networks provide the 1099-K forms, and separate payments made through other accounts won’t be included in the form.
As an example, PayPal will handle the reporting if you are paid through an account that is directly handled and funded by PayPal. Then, PayPal will record both a single transaction that exceeds the threshold and numerous transactions that are equivalent to it, generate a 1099-K form, and send it to you.
What Is a 1099-K Used For?
Form 1099-K, also known as an information return, is used by credit card companies and third-party payment processors to record the payment transactions they process for retailers, businesses, contractors, and other third-party business transactions. Further, since 1099-K is an information return, you can use it to compute additional items for your tax return. You can also use a 1099-K to figure out how much net profit you had in the previous year.
How Do I Report 1099-K Income on My Tax Return?
According to the official announcement from the Internal Revenue Service on December 23, 2022, the decreased reporting threshold will not apply to 2022 tax returns.
Third-party settlement companies issuing Form 1099-K for the calendar year 2022 are only required to record transactions according to the previous law: when the gross payments exceed $20,000 and there are more than 200 transactions. You will need to report your 1099-K income with the adjusted threshold for 2023.
Your 1099-K income must be shown on your tax return. If you’re a sole owner or a private contractor, you’ll need to calculate and report your business revenue on a Schedule C that you’ll include with your tax return. However, getting a 1099-K does not always indicate that you must pay taxes on the money received. First of all, not every transaction on your 1099-K may be related to your place of business. Further, you may also have tax deductions that could balance some of your income. Looking at your Form 1099-Ks from credit card companies or third-party payment settlement organizations, you can determine how much money you made from your customers and clients.
Reporting 1099-K Income on Tax Return
How you received the 1099-K income will determine how you should report your income on your tax return. For example, if you are self-employed or an independent contractor, you must record your 1099-K income on Schedule C of Form 1040, an IRS tax form used for personal federal income tax returns. Simply input your gross 1099-K income on line 1a of Schedule C to report your income. The cost of items sold must also be determined and reported on Schedule C line four. After that, deduct related business expenses in Schedule C Part II.
Take note that your 1099-K revenue is distinct from any income you get in cash, checks, or other forms. Line 1b should contain the total revenue derived from these techniques. By combining the amounts on lines 1a and 1b, you may determine your gross sales for the year. Line 1d should have the entire sum. It is your responsibility to keep track of all company expenses and deduct them from your income on Schedule C.
To put it another way, your approach to reporting your 1099-K income will vary depending on what you do and how you get paid. The proper way to report your income will be indicated on the tax return form itself, helping you to report your income for your tax return correctly.
What’s the Difference Between a 1099-K and a 1099-NEC?
According to Nerd Wallet, Form 1099-NEC is a tax form used to report pay given by a company to a non-employee. After being reintroduced at the beginning of the 2020 tax year, Form 1099-NEC is a relatively recent addition to the barrage of tax records that are distributed every January. Formerly, businesses reported similar payments using Form 1099-MISC. Any independent contractor or freelancer who receives at least $600 from one client should receive a 1099-NEC from that client.
Even though both forms detail the revenue you received during the tax year, 1099-NEC and 1099-K are distinct. The primary distinction is that a 1099-K can only record payments made to you directly by a third party, but Form 1099-NEC reports payments to independent contractors of all kinds. If you receive a 1099-NEC or a 1099-K, either one is acceptable, but you must utilize it differently when you file your taxes.
The total amount of transactions handled on your behalf is shown on a 1099-K instead of a 1099-NEC. In addition, the amount you see on a 1099-K includes fees and commissions, which you can deduct from your taxes as business expenditures. The commissions and other deductible fees won’t be included in your 1099-NEC; therefore, the 1099-K allows you to include this revenue on your tax return.
The Bottom Line
Form 1099-K, Payment Card and Third-Party Network Transactions, is mandatory for the IRS to report payment transactions from credit and debit cards and third-party settlement organizations to enhance voluntary tax compliance. Moreover, the 1099-K can be a terrific tool for you to assess how well your work or business is performing based on the income reported on your Form 1099-K. Your 1099-K income should be reported on your tax return because it still counts against your overall income.
You can rely on Core Group if you require assistance with your 1099-K or if you need additional details regarding how to report your 1099-K income and how to take advantage of the procedure that can improve your tax situation. Core Group is a reputable provider of tax planning and financial solutions.
Contact us today and learn more about how our services can fulfill your tax demands and help you advance your financial success.