1099-K: The Basics
Tax season requires some planning and organization for everyone, and that’s especially true if you’re self-employed. In addition to tracking business-related expenses, you likely need to track revenue streams from multiple customers.
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Form 1099-K tracks payments you received through a payment processor or PSE. This includes tracking payments via:
- credit cards
- Online payment services such as PayPal
- And even freelance platforms like Upwork that manage customer payments for you.
The Form 1099-K shows the value of transactions that PSE has processed for you over the past year and any expenses paid on your behalf by your customers.
The IRS requires each payment processor to mail you a Form 1099-K 31 January to companies and individuals that have crossed the threshold for the year. For tax years prior to 2022, the threshold is payments of at least $20,000 and at least 200 transactions. For tax years beginning in 2022, the threshold is simply $600 in payments without considering the number of transactions.
But you could still get 1099-Ks from some PSEs even if the form isn’t required by the IRS. Many PSEs send 1099-Ks to all of their providers, even if they’ve only processed a handful of transactions and are well below the threshold.
Using the 1099-K form to prepare your taxes
You must keep all of your 1099-K forms to prepare for tax time, as each form reports a portion of your self-employment income for the year. Use the information on your 1099-Ks along with your other books and records to determine your annual income. However, remember that just because you didn’t receive a Form 1099-K doesn’t mean you don’t have to report all the earnings you did receive.
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If you’re a solopreneur or sole proprietorship, your 1099-Ks count toward your self-employment income subject to self-employment tax. Enter the information from your 1099-Ks into your Plan C as income.
If your client pays some expenses on your behalf—for example, processing fees that are already deducted before the payment reaches you—your 1099-K should include those expenses and report income that is more than you actually received. Don’t worry. You can deduct these fees as a business expense in your Schedule C so that your tax liability accurately reflects your income.
Do not mix business with personal finances
Payment Settlement Entities (PSEs) cannot differentiate between business and personal payments, so you should not mix the two. Make sure you don’t accept payments for personal expenses on the same accounts you use for business expenses.
Suppose a relative wants to send you $100 for your birthday using your credit card reader. PSE cannot see that it is a personal gift rather than a business transaction. As a result, the gift is included in the total displayed on your Form 1099-K.
While you don’t need to claim this gift as income, discrepancies between the income reported on your 1099-Ks and the income you report to the IRS can raise red flags that may trigger an audit. Avoid headaches by only using your business PSEs for business transactions.
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