Clarifications and complexities of the new 1099-K reporting requirements
If you are self-employed, freelance, work on a contract with no withholding tax, or part of the gig economy, you may be used to receiving Form 1099-NEC or 1099-K (formerly 1099-MISC). from business customers or customers who paid you at least $ 600 during the year. If you accept credit / debit cards or use third-party clearing houses like PayPal, you may get a form you’ve never seen before to file tax returns for 2022 starting in 2023, – Form 1099-K, Payment Card and Third Party Network Transactions, and it can get a little trickier, especially if you’re not prepared for it.
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions, is an informational feedback that tracks payments, including those made with credit cards; Cash apps like Venmo or Square Cash App; Online payment services such as PayPal or Stripe; and freelance platforms that manage payments like Uber or Upwork. It reports the gross amount of reportable transactions for both the calendar year and the corresponding months to the IRS and to those who accept the payment cards or third-party payments.
Form 1099-K is sent to payees who accept credit cards or payments processed through third-party networks. The de minimis, also known as the minimum amount exception for reporting third party network transactions, were payments of more than $ 20,000 and 200 transactions for the year. That threshold was drastically lowered from $ 20,000 to $ 600 in 2022 with no minimum number of transactions.
Why the big change?
Payment processing units (merchant acquiring units and third party processing organizations) must report payment card and third party network transactions. This reporting requirement began in early 2012 for payment card and third-party network transactions. The COVID-19 pandemic resulted in an influx of gig economy workers who joined the others before they reported their income incorrectly or inaccurately – either intentionally or unintentionally – for not receiving a Form 1099-K. Third-party reporting of information has been shown to increase voluntary tax compliance and improve surveys and assessments within the IRS.
The importance of the records
Understanding and properly claiming all of the deductions available to you is more important than ever because the “Gross Amount” on the 1099-K is the total unadjusted dollar amount of payment transactions made to you. This amount may not be adjusted to account for fees, refunds, or any other amount prior to being reported in the 1099-K and the IRS. This means that Form 1099-K should include the value of transactions processed for you in the past year, as well as any expenses paid by your customers on your behalf, such as those expenses and should report higher income than you received.
If you allow your customers to receive cashback when they use their debit cards to make purchases, then your Form 1099-K will include the cashback amounts as part of the gross amount of the payment card transactions. You would typically not include any cashback amounts on your income tax return or claim it as a business expense. It is important that you keep a record of customer cashback activity during your tax year. If you allow your customers to receive cashback when they use their debit cards to make purchases, the 1099-K you receive will include those cashback amounts as part of the gross payment card transactions. In general, you would not include cash back amounts on your income tax return as part of your gross earnings. It is important that you keep a record of customer cashback activity during your tax year.
If you’ve shared your credit card terminal with another person or company, your Form 1099-K will contain payment card transactions from the person or company who shared your terminal in addition to your own payments. If necessary, you must file and provide informational feedback for those with whom you have shared a card terminal, including the total payment card transaction amount and any other revenue belonging to them. If necessary, you should submit and provide an appropriate information declaration (e.g. Form 1099-K or 1099-MISC) for each person or company with whom you have shared a card terminal. The information return should include the total amount of the payment card transaction in addition to any other income for the other person or company. You should keep a record of payments made to any person or company sharing your terminal, including, but not limited to, written agreements on shared terminals and canceled checks.
This is also a great example of why you shouldn’t mix up your personal and business finances: the 1099Ks store all of your transactions. While you should only include business expenses on your tax return, the IRS won’t know otherwise, and questions – and exams – exist.
1099-K versus 1099-MISC (now 1099-NEC for non-employee compensation)
Another mistake to watch out for is duplicate transactions. The IRS has directed that any 1099-NEC or 1099-MISC payments reported on a 1099-K should only be reported on the latter form. To avoid double taxation, keep detailed sales records and watch out for double payments. Organizations must deploy a 1099-NEC for non-employee compensation of $ 600 or more. Credit card payments must be reported on Form 1099-K, not Form 1099-NEC. However, if the transactions were through credit card or third party processors, chances are they could be reported incorrectly on both forms.
Report 1099-K information
After you have thoroughly checked your credit card / payment card receipts and merchant statements to make sure the amount is correct, report gross receipts or sales and business expenses on the tax form that you would normally submit. If you are a sole proprietorship, record the information from Form 1099-Ks as income and subtract fees and other business expenses that are included in the grand total in Appendix C. Remember that the gross amount of a reportable payment on Form 1099 -K does not include adjustments such as credits, discount amounts, fees, refund amounts, or other amounts. Partnerships and corporations report amounts on Form 1099K as part of their gross income on their respective income tax returns.
If your business has more than one source of income, you may need to report the Form 1099K amounts on more than one line, return, or schedule; For example, if you have both a retail store and rental income and you use the same credit card terminal for both ventures, your 1099-K will include gross credit card receipts for both. You must rely on your own accurate records to properly report gross retail receipts in Appendix C and rental activity in Appendix E.
Contacting the applicant or using Form 1099-K. listed payment processing agent
You must contact the Form 1099-K submitter using the information in the top left corner of the form if you receive a Form 1099-K that does not belong to you, if it contains errors or contains a dealer category code that does not accurately describe yours, or in other cases, to find out why you received it or to request a corrected Form 1099-K. If you do not know the applicant, you can contact the payment processor using the name and number in the lower left corner of the form to find out why you received the form or request a revised Form 1099-K. Retain all correspondence and relevant documentation on errors. If you can’t correct your Form 1099-K, the IRS says you can correctly report your income and include a return on your tax return.
If you use Form 1120, 1120S, or 1065 to report your business income and then receive a Form 1099-K with your unique name and social security number, request a corrected Form 1099-K with your company’s tax identification number and request the Use of the deal number in the future. If you have changed your business structure during the year, e.g. For example, if you converted from a sole proprietorship to a partnership and continue to use the same card reader, the amount on the 1099-K may not match your new company’s tax return. Let your merchant acquirer know of any change in the name and tax identification number that links the terminal to your current business structure.
Another case when you should request a revised Form 1099-K is if you bought or sold your business during the year and your Form 1099-K includes payments for transactions that were made before or after the transaction, because the tax identification number and the company name start with a. connected credit card terminal has not been updated.
Hobby or business?
Online auction sites like eBay are an example of how important this is. eBay sellers may receive Form 1099-K, but may be required to report and pay taxes based on how they are selling on the site. If it is considered a hobby by the IRS, income must be reported but expenses cannot be covered. If they are running their eBay account more like a business they should report your sales to the IRS but are allowed to make deductions.
Something like a craft business during the holidays can also raise questions. If you bring credit cards to a craft show, you will be provided with a Form 1099-K; In addition, if you accept payments from an outside processing organization, you will receive 1099-K of this, even if the total amount of payments for goods and services exceeds $ 600 during the year when you would previously only have received one for the latter.
While the new rules for IRS oversight are necessary as the gig economy and freelance work continue to expand, they can and will affect people even if they get them for a relatively small sideline rather than a primary source of income. If in doubt, consult a tax advisor.
Candace J. Dixon has been an accountant since 1996. She holds a bachelor’s degree in accounting from Saint Leo University in Tampa, Florida and is a Certified Advanced QuickBooks ProAdvisor. She specializes in tax and advanced accounting and is familiar with the Internal Revenue Code and the gig economy. Her areas of expertise are tax advice, tax planning and research into complex tax issues. She is currently employed as a Senior Tax Accountant at CWSEAPA PLLC in Orlando, Florida. www.craigwsmalleyea.com.