What is Form 1099-K and which businesses need one?

Update: As of December 23, 2022, the Internal Revenue Service announced a delay in the implementation of the $600 reporting threshold. Please check back frequently for further details.

If you’ve done any kind of freelancing or contract work, you’re probably familiar with an IRS Form 1099. Any form that starts with 1099 reports a category of non-W-2 income to the International Revenue Service. 

The 1099-K is an important form in this series, and more taxpayers than ever before might be receiving one come January 2023. According to a new regulation from March 2021, if you’ve received $600 or more in business payments through a service like PayPal, Venmo, or Cash App, you may get a Form 1099-K. While these forms are certainly nothing to fear, they might make filing your taxes a little more complicated.

Let’s start with the basics. A Form 1099-K is an IRS form used to report debit and credit card transactions from third party network payments. Third party network payments are payments made and received through outside networks like Venmo and PayPal. These networks can also be called a payment settlement entity (PSE). The third party network, or PSE, is required to fill out the 1099-K and send a copy to the IRS and the person who received the payments.  

The use of Form 1099-k serves to improve voluntary tax compliance and ensure people report their business income on their tax returns. 

A Form 1099-K is different from Form 1099-NEC, which reports payments to independent contractors of all kinds. A 1099-K will only report payments made to you by a third party.

Minimum transaction reporting thresholds have decreased for third party network transactions. When the American Rescue Plan Act passed in 2021, it dropped the Form 1099-K requirements dramatically, from $20,000 and more than 200 transactions to $600 and any number of transactions. This means you might receive a 1099-K if you:

• Sold items on sites like eBay, Etsy, or Ticketmaster
• Received business funds on Venmo, PayPal, Zelle, Cash App, or other payment apps
• Worked for app-based companies like Lyft, Uber, or DoorDash
• Did freelance work online

It’s also important to note that you can receive Form 1099-K even if you don’t have a business, as long as you receive over $600 in payments from apps in a calendar year. With more and more people buying and selling with these platforms, as well as paying for purchases and services on apps like Venmo, it’s likely to be a confusing time for taxpayers, especially since millions of Americans are likely to be impacted. 

If your business provides services or sells goods and accepts credit cards, debit cards, gift cards, or other payment cards or uses apps to receive payments, you’ll most likely get a Form 1099-K. It’s also possible that you’ll receive 1099-K even if you didn’t hit the $600 mark. Some businesses choose to send them regardless of the minimum. In that case, you’ll still need to consider the amounts listed on the form when you file your tax return — but you may not owe taxes on this income at all.

If you’re an independent contractor or self-employed, you typically report your income on Schedule C of your Form 1040 individual tax return, and that includes what you see on your Form 1099-K. If your business is considered a pass-through entity like an S corporation or partnership, you’ll report the information on a Form 1120, 1120S, or 1065. 

Again, receiving a Form 1099-K doesn’t necessarily mean you owe taxes on that money. Not all of the transactions reported on the form may be business-related, and you may have tax deductions that will offset some of your business income.

Also, make sure you don’t double report your income. If you did $5,000 worth of freelance work for a client who paid you through PayPal, you’ll receive both a Form 1099-NEC and a Form 1099-K reporting that same $5,000. While you’re responsible for reporting all of your business income to the IRS, you’ll only have to file your 1099-NEC since it’s a more comprehensive form. This will prevent you from reporting the income twice. 

Confused? The new regulations for Form 1099-K might seem a bit daunting, but Avalara is here to help you make sense of it all. Stay on top of your taxes this year with a little help from Avalara 1099 (powered by Track 1099).