Decoding Form 1099-K for the self-employed

1099-K: The basics

Tax season requires some planning and organization for everyone, and that’s especially true when you’re self-employed. On top of tracking business-related expenses, you’ll likely need to track income streams from several clients.

Form 1099-K tracks payments you’ve received through a payment settlement entity, or PSE. That includes tracking payments made via:

• Credit cards
• Online payment services like PayPal
• And even freelancing platforms like Upwork that manage client payments for you.

Form 1099-K shows the value of the transactions the PSE has processed for you in the past year. Even if you are not self-employed or a small business owner, you can still get a Form 1099-K.

The IRS requires each payment settlement entity to send you a Form 1099-K by January 31 to business and individuals that surpassed the threshold for the year. For tax years 2023 and earlier, the threshold is for third-party network transaction payments exceeding $20,000 and exceeding 200 transactions.

The IRS planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, the IRS recently delayed the implementation of the new $600 reporting threshold for transactions from third party processors like Venmo and Paypal, reverting tax year 2023 back to the previously higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions).

However, some individual states have already begun to use the lower reporting threshold. Maryland, Massachusetts, Vermont, Virginia and the District of Columbia have a $600 threshold for requiring 1099-K in effect for 2023. North Carolina and Montana also have a $600 threshold, although state tax officials have said these states may offer relief. If you don’t receive a 1099-K, the IRS still expects you will report all your income, regardless of the amount.

There is no threshold for payment card transactions such as credit card swipes.

But you still could receive 1099-Ks from some PSEs even when the form isn’t required by the IRS. Many PSEs send 1099-Ks to all their vendors, even if they’ve only processed a handful of transactions and fall well short of the threshold.

Using the 1099-K form to prepare your taxes

You’ll need to keep all of your 1099-K forms to prepare for tax time, since 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. But remember that just because you did not receive a 1099-K form doesn’t mean that you don’t have to report all of the income that you received.

If you’re a solopreneur or sole proprietor, your 1099-Ks count toward your self-employment income, which is subject to the self-employment tax. Record the information from your 1099-Ks as income on your Schedule C.

If your client pays some expenses on your behalf—for example, processing fees deducted even before payment reaches you—your 1099-K should include those expenses, reporting an income higher than you actually received. Don’t worry. You can deduct those fees as business expenses on your Schedule C so your tax liability will accurately reflect your income.

Don’t mix business with personal finances

Payment settlement entities (PSEs) can’t distinguish between business payments and personal payments, so you should not mix the two. Make sure you do not accept payments for personal expenses on the same accounts you use for business expenses.

For example, let’s say a relative wants to send you $100 for your birthday and uses your credit card reader to do it. The PSE can’t tell that it’s a personal gift instead of a business transaction. As a result, the gift is included in the total shown on your Form 1099-K.

While you don’t have to claim that gift as income, any discrepancies between the income reported on your 1099-Ks and the income you report to the IRS may send up red flags, potentially triggering an audit. Avoid the headache by using your business PSEs for business transactions only.

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