What is a Form 1099-K? Definition, Uses, Threshold and Filing

Do you run a small business, sell products online on Etsy, or work as a cab driver for Uber? If so, you might receive Form 1099-K—an informational document used to report payments for tax purposes. Understanding what Form 1099-K is and how it impacts your taxes is important for business owners and self-employed individuals. In this guide, Commenda answers what is Form 1099-K and breaks down its latest changes

Form 1099-K: Definition and Uses 

The 1099-K Form is also known as the Payment Card and Third-Party Network Transactions form. It is used by third party payment processors to report payments made to a business. The 1099-K form is issued by companies which process payments on behalf of businesses (think Paypal). It tracks income businesses receive through payment platforms and ensures that income is reported to the IRS.

In 2024, businesses are required to pay close attention to the Form 1099-K because the IRS has delayed the new $600 reporting threshold until 2026. According to the latest guidelines, the reporting threshold remains at $5,000 no matter the number of transactions.

What Is a Form 1099-K?

Form 1099-K is a tax form used to report payments made through third-party payment processors like PayPal, Stripe, and Amazon. If a business receives payments through any of these platforms, the payment processor is required to file the 1099-K form with the IRS.

Payment processors will send businesses a copy of this form by January 31st, detailing the total amount of payments processed through their system for the year. The Form 1099-K reports payments made through these third-party processors, not payments made directly (e.g., checks or cash transactions). Each payment processor is supposed to send you a separate Form 1099-K if you cross the threshold.

When Are 1099-K Forms Issued?

Under current IRS guidelines, form 1099-K is issued when a business receives payments over $5,000 in gross payments through third-party apps. 

While the reporting threshold for 2024 remains at $5,000, the IRS plans to lower this threshold in future years. Starting in 2025, the threshold will drop to $2,500, and by 2026, the threshold will be $600.

Some states have their own reporting thresholds for Form 1099-K, which differ from the IRS requirement. If you live in one of these states, you might receive a Form 1099-K even if your earnings are below the IRS threshold.

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What Is a Form 1099-K Used For?

Form 1099-K provides the IRS with a detailed report of a business’s payments received through third-party platforms. This helps the IRS verify that businesses are reporting the correct income on their tax returns.

The information on the 1099-K form is used to reconcile income on your tax return, typically reported on Schedule C for sole proprietors or self-employed individuals. It’s important to note that Form 1099-K reports gross income, not net income, meaning it includes all payments received before deducting any refunds or fees. Businesses must keep detailed records of expenses and refunds to accurately report net income on their tax returns.

Who Receives Form 1099-K?

Businesses that process payments through third-party platforms like PayPal, Stripe, and Square are most likely to receive Form 1099-K. This includes:

• Online sellers: Those who sell goods or services on platforms like eBay, Amazon, and Etsy.
• Freelancers and independent contractors: People who provide services on platforms like Uber, Lyft, or Fiverr.
• Small businesses: Any business that processes a significant amount of transactions through payment processors.

If you meet the reporting threshold for the year, you should expect to receive a Form 1099-K from your payment processor.

Form 1099-K Reporting Threshold for 2025

For the 2025 tax year, the reporting threshold will drop to $2,500. As mentioned earlier, the IRS has delayed the implementation of the new $600 reporting threshold for Form 1099-K until 2026. These changes improve income reporting, especially for self-employed individuals and small business owners who may have previously overlooked or miscalculated their earnings.

Is Income on Form 1099-K Taxable?

Yes, the income reported on Form 1099-K is typically taxable. If the payments you receive are for goods or services provided in the course of your business, you must report that income on your tax return. 

However, not all payments reported on a 1099-K are taxable. For instance, payments and gifts received from family and friends are generally not taxable and should not be reported on your tax return. To avoid confusion, keep track of non-business payments separately, especially if they are processed through a payment app.

Step-by-Step Guide to Report 1099-K Income on Your Tax Return

If you receive a Form 1099-K, it’s essential to report this income accurately on your tax return to avoid errors and potential penalties. Below is a clear, professional step-by-step guide to help you through the process:

1. Gather Your Documents
   Collect Form 1099-K from all third-party payment processors, along with any other income-related documents (e.g., Form 1099-NEC, Form 1099-MISC). Additionally, ensure you have detailed records of your expenses, refunds, discounts, and fees charged by payment processors.
2. Understand the Gross Amount on Form 1099-K
   The total amount reported on Form 1099-K represents gross income, which typically does not account for adjustments like refunds, fees, or discounts. It’s crucial to reconcile this figure with your own records to ensure accuracy.
3. Report Income on the Correct Tax Form

• Sole Proprietors: Use Form 1040, Schedule C to report income and expenses.
• Partnerships and Corporations: Use Forms 1120, 1120S, or 1065 as applicable.
• Farming Businesses: Use Schedule F. Ensure that the income from your 1099-K matches what you report on these forms.

4. Deduct Business Expenses
   Account for eligible business expenses, such as advertising costs, payment processing fees, web hosting charges, internet costs, and home office expenses. These deductions will reduce your taxable income, so ensure they are well-documented and reported correctly.
5. Verify Information for Accuracy
   Compare the income reported on your Form 1099-K with your records. If discrepancies exist (e.g., personal payments incorrectly included as business income), contact the payment processor to correct them or adjust them properly on your return.
6. File Your Tax Return on Time
   Once you’ve reviewed your records and filled out the appropriate forms, submit your tax return by the filing deadline (typically April 15th). If you’re uncertain about any step, consider consulting a Commenda’s qualified tax professionals to make sure you file your returns correctly.

Are Sales on Marketplaces Reported on 1099-K Form Taxable?

Sales conducted on online marketplaces like eBay, Etsy, or Amazon are generally taxable and should be reported on your Form 1099-K. However, not all transactions on these platforms may be subject to tax.

• Taxable Transactions: If you're selling goods or services as part of a business, the income from these sales is taxable.
• Non-Taxable Transactions: Personal sales, such as selling your personal items occasionally, may not be taxable. These can include income you earn from selling your personal goods to others.

You must maintain detailed records of all sales, as the IRS can ask for clarification if they appear inconsistent with your reported income.

How Online Sellers Should Report Form 1099-K Income

For online sellers, reporting income from Form 1099-K can be straightforward if you follow these steps:

1. Separate Personal and Business Transactions: Ensure that the payments you received through third-party platforms are business-related and not personal payments.
2. Keep Accurate Records: Track all your expenses, including transaction fees, shipping costs, and other business-related expenditures.
3. Include Gross Income on Schedule C: Report the total amount from your 1099-K form as part of your gross income on Schedule C.
4. Consult a Tax Professional: If you’re unsure how to handle deductions or specific transactions, seek guidance from a tax professional. Book a free demo with experts from Commenda!.

Navigating Tax Compliance for Online Sellers: Get Help with Form 1099-K

The IRS website provides helpful guides and FAQs on Form 1099-K, including information on what constitutes taxable income, how to report it, and how to resolve discrepancies. Sellers can refer to these resources to clear any doubts about Form 1099-K reporting obligations.

If you are in doubt, hiring a tax professional can help ensure compliance. Commenda’s expert tax advisors can offer tailored advice, ensuring that deductions are maximized, and no errors are made on your tax return.

Conclusion

Form 1099-K is a crucial document for online sellers, gig workers, and small business owners who receive payments through third-party payment processors. Understanding how this form works and how to report the income it reflects on your tax return is vital for staying compliant with IRS regulations. 

With the right resources and Commenda’s assistance—whether it's accounting software, tax preparation platforms, or professional guidance—online sellers can make tax reporting hassle-free. With Commenda at your side, you can ensure that your Form 1099-K income is properly reported, giving you peace of mind as you focus on growing your business.