Everything You Need to Know About Form 1099-K
Do you accept credit card payments for your work? What about payments through apps like PayPal or Venmo? If you answered yes, you might just receive a Form 1099-K next year.
What is Form 1099-K?
At this point, you’ve probably heard about the 1099-NEC and 1099-MISC forms. They're part of the IRS’s 1099 series. Basically, every form that starts with “1099” is going to report some category of non-W-2 income.
Form 1099-K is another hugely important form in this series. It’s issued by credit card companies and third party payment processors like Stripe, PayPal, Cash App, or Venmo. These service providers are broadly referred to as “Payment Settlement Entities” (PSEs).
The 1099-K is used to report the following types of payments to the IRS:
- 💳 Credit cards (like Visa, MasterCard, American Express, and Discover)
- 🏧 Debit cards
- 🎁 Stored value cards (like gift cards)
- 📱Payment apps (like Stripe, PayPal, Shopify)
1099-K vs. 1099-NEC: What’s the difference?
As I've mentioned, 1099-K and 1099-NEC are very similar in nature. Both report independent contractor payments over $600.
The only real difference is the types of payments they both report. Basically, the 1099-K covers all digital transactions that aren’t ACH, EFT, or direct deposit. Those are covered by the 1099-NEC, which also covers payments by cash and check.
Here’s a simple summary of how the two forms are used:
Now that the 1099-K has expanded to include all payments over $600, the burden for business owners to file 1099s will be substantially reduced. Let’s go through an example.
Linda, a real estate agent, paid three contractors more than $600 last year. Before, she’d be on the hook to file three 1099-NECs. But with the new changes, she’s only responsible for the contractors she paid in cash.
Contractor A will receive a 1099-K because all of his payments were made by credit card.
Contractor B will receive both a 1099-K and a 1099-NEC. Note: If they only received cash payments of $599, they would not need to be issued a 1099-NEC. 1099-K payments do not contribute to the 1099-NEC reporting threshold.
Contractor C will only receive a 1099-NEC since all of his payments were cash.
Who should receive a 1099-K?
For 2022 and onward, the 1099-K has many of the same parameters as the 1099-NEC. You’ll likely receive one if:
- You were paid more than $600, and
- You had any number of digital transactions
Prior to 2022, 1099-Ks were only issued to taxpayers who:
- Had gross payments of $20,000 or more, and
- Had more than 200 digital transactions
As you can imagine, 1099-Ks weren’t too common – at least compared to 1099-NECs. But starting in 2023, that’s all about to change. So if you work with contractors and you're looking to avoid filing 1099-NECs, start paying your contractors through third-party merchants!
Will personal transactions show up on a 1099-K?
There’s a lot of confusion out there about this, so I want to set the record straight: the only accounts that will be issued 1099-K’s are those that are either:
- Listed as business or merchant accounts, or
- Personal accounts where the transactions are tagged as “goods and services,” rather than “friends and family”
That’s because personal transactions don’t count towards the 1099-K threshold. If your roommate Venmos you their half of the rent, or your aunt sends you some birthday cash via PayPal, that shouldn’t show up on a 1099-K.
That being said, it’s extremely common for self-employed individuals to commingle their accounts – meaning, they use the same accounts for business and personal transactions.
That means if you’re using a personal PayPal account for work, the payments you receive have to be tagged as “goods and services,” or you won’t be issued a 1099-K.
If you identify as any of the following, you should probably verify that your accounts are set up correctly:
- Gig workers
- Independent contractors
- Side hustlers
- Members of a partnership or LLC
- Anyone else with business income
When will you get your 1099-Ks?
Recipient copies are due January 31st, so expect them to start arriving in late January or early February at latest.
How to use the 1099-K at tax time
For freelancers and independent contractors, you’ll refer to any 1099-Ks you get when you file your taxes. The amount in box 1 of your 1099-K should be reported under gross receipts on your Schedule C.
If you’re using the Keeper Tax app to file, you can simply upload the form and we’ll do the rest.
Keep in mind: The 1099-K only represents your credit card and third party payments. That means your Schedule C income might actually be higher than what’s reported on your 1099-K (after factoring in your additional income from cash and checks).
What to do if your Schedule C income is less than your 1099-K income
Occasionally, your gross receipts on Schedule C might be less than what’s reported on the 1099-K.
This could be the result of commingling your business account with your personal account, or a timing difference.
For instance, the credit card company might include a transaction that was made on 12/31, but didn’t hit your bank account until January 3rd of the following year.
If that happens to you, be sure to keep notes explaining the difference. The IRS’s database is built to flag discrepancies between 1099 forms and the corresponding tax returns. They even designed custom notice letters for taxpayers who underreported their 1099-K earnings. So if you report less than the 1099-K, keep notes!
Understanding your 1099-K
To make sure you’re reading your 1099-K correctly when it’s time to file taxes, let’s take a peek at the key boxes on this form. They’re higlighted in red on the form below, so you can follow along:
💸 Box 1a: Gross payments
As discussed above, box 1a is what you’ll report on your Schedule C as gross receipts. This is the only box that really matters for most taxpayers.
💳 Box 1b: Card not present
This box represents payments that were made with a credit card that wasn’t physically present — such as payments online or phone payments. In many cases, box 1a and 1b will be the same.
📇 Box 2: Merchant category code
A merchant category code is used to describe what industry the revenue is being generated in.
You don’t need to do anything with it, but it’s worthwhile to make sure it’s consistent with the NAICS code you pick for your Schedule C.
For instance, if you work in ecommerce, and the code on your 1099-K is 5812 - “Eating Places and Restaurants,” you should probably reach out to the 1099-K issuer and request a more accurate code.
🧮 Box 3: Number of payment transactions
This is a relic of the old 1099-K rules that required at least 200 transactions before the reporting requirement kicked in. All this shows is the number of transactions that occurred during the year.
🪣 Box 4: Federal withholding
Not many recipients are going to have federal or state withholding, but if you do, don’t miss it! Always be sure to report the withholding on box 4 or 8 on your 1040 return.
📅 Box 5a-i: Monthly transactions
These boxes are informational and don’t typically have any application on your return.
☎️ PSE’s name and telephone number
The last box I want to call out is the contact info for the Payment Settlement Entity (PSE). If you notice a mistake on your 1099-K, this is the number you should call to correct the error.
What to do if your 1099-K is wrong
There could be a number of reasons why your 1099-K is incorrect, but let’s take a look at the most common – and what to do about each of them:
🚩 Information errors on your account
If your online account lists the wrong business name or tax ID number, your 1099-K will probably need to be corrected.
Reach out to the payment settlement entity listed on your form to have this information updated.
📫 Personal account used for business
This is extremely common: many freelancers end up using their personal accounts for work and forget to have their customers tag payments as "goods and services." Consequently, the merchant doesn’t issue a 1099-K for their income.
If this happened to you, don’t fret! Simply report the business income that was made through your personal account last year, and get set up with a business account for all future payments. No need to contact your PSE and request a 1099-K.
👥 Shared credit card terminal
In some instances, multiple people or businesses will share the same credit card terminal or merchant account. In those cases, inform the PSE which payments apply to your business so that your sales aren’t overstated.
🦋 Entity change
If your business entity changes during the year or you register for a new tax ID number or business name, the PSE will need to be informed.
If you allow customers to get cash back using their debit card, it’s likely those will be reported on your 1099-K even though they aren’t revenue to you.
If that’s the case, you have two options. You can either:
- Contact the PSE and request a corrected 1099-K, or
- Report the cash-back payments on your Schedule C under “Other expenses” or “Returns and allowances” to offset the overstated income.
General guidance for all 1099 forms: They should support the records you already have, not be relied upon to create them. Best practice is to keep track of your business income and expenses throughout the year, and use the 1099s you receive as additional verification.
The Keeper App can help streamline this process for you by tracking and sorting your business expenses as you go.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.