Tax season will soon be upon us so we’re answering some common questions merchants have about the forms and acronyms you will come across when preparing taxes for your small business. For small business owners, tax season means filing Form 1099-K.
What is Form 1099-K?
In 2006, it was determined that Americans underpaid their taxes by a staggering $450 billion. To correct this, the 2008 Housing and Economic Recovery Act included new requirements for banks and credit card merchants to report payments to the IRS. This requirement is intended to increase tax compliance from independent contractors, freelancers, creators, and others contributing to the massive and growing gig economy.
Form 1099-K, Payment Card and Third-Party Network Transactions was first issued in 2012 for reporting the 2011 tax year. This form is intended as an information return used to report payments received through payment card transactions like debit, credit, or gift card transactions and through third-party payment networks like PayPal, Etsy, Shopify, Amazon Payments, and others.
What is the difference between Form 1099-K and Form 1099-MISC?
Based on their names, it would be easy to assume that Form 1099-K and Form 1099-MISC are fairly similar. However, they serve two different purposes that are important to understand when you’re filing your taxes.
One of the key differences between the two forms is who they are sent from. Form 1099 K is sent to you from a financial institution. Form 1099-MISC is sent to you from businesses for whom you have supplied more than $600.00 in freelance or contract work. Form 1099-K is specific to payments from card transactions. You will receive Form 1099-MISC from a business regardless of the form of payment tendered.
Will I receive Form 1099-K?
According to the IRS, you will receive your Form 1099-K from each payment settlement entity from which you “received payments in settlement of reportable transactions.”
This means that you will receive Form 1099-K prior to January 31st if:
- You accepted debit, credit, or preloaded stored value cards and/or
- You received settlement of third-party network transaction above the minimum reporting threshold of
- Gross payments over $20,000 AND
- More than 200 transactions
As if this isn’t complicated enough, state law may require businesses to report incomes over a certain amount which is different than the federally required amounts. Be sure to check your state requirements to make sure that you are reporting accurately.
How do I report my Form 1099-K on my tax return?
The amount from your 1099-K form makes up a portion of your business income (or gross receipts) which you’ll need when filing your income tax return. Your 1099-K form should also match your own records. To help you correctly report your gross receipts on your income tax form, the IRS recommends that you:
- Confirm payment card receipts equal the amount listed on your 1099-K
- Ensure income tax filing reflects the amount of your annual gross receipts
- Confirm all income stemming from your payment transactions is reported
- Keep records which demonstrate income and deductions
It might be helpful to remember that your payment processor sends the same information to you and the IRS, which includes:
- Monthly gross credit/debit card processing
- Legal business name
- Tax Identification Number (TIN)
- All sales of the current tax year between January 1st through December 31st
What do I do if I did not receive a Form 1099-K?
Even if you did not receive a Form 1099-K from the payment processing company, you are still responsible for filing and reporting that income with the IRS so it’s important to do your due diligence.
If you didn’t receive a Form 1099-K, here are a few tips to help you.
- First, ensure you fulfilled the criteria to be receiving a 1099-K for the current tax year
- Once confirmed, contact the payment processor to confirm that one has been prepared
- If the processor did not prepare one, report your sales on Schedule Cof your Form 1040 and leave 1099-Kline blank
- If the processor did prepare one, confirm your business name and address matches what they have on file
- Report the income that should be included on the Form 1099-K
What happens if there is a mistake on my Form 1099-K?
If you find any errors on your 1099-K, contact your payment processor to have the corrections made as soon as possible. Make sure to give specific details such as the tax year and include any supporting documentation in your request.
If you use Payments Hub, you can e-mail firstname.lastname@example.org or call 866-485-8999, ext. 1300. Be sure your request includes the tax year(s) involved in the request, as well as specific details explaining the concern with the 1099-K.
For more information, visit www.irs.gov/pub/irs-pdf/f1099k.pdf