Form 1099-K

Why do you need to file a 1099-K?

The primary purpose of Form 1099-K is to report income received through payment card transactions (credit card and debit card) and third-party network transactions (e.g., PayPal, Square, Stripe, Venmo). The form is provided by the entity that paid the income to the recipient and a copy is also sent to the Internal Revenue Service (IRS). Here are the primary aspects of the form:

Tax Reporting

• The primary purpose of Form 1099-K is to report income received through payment card transactions (credit card and debit card) and third-party network transactions (e.g., PayPal, Square, Stripe) to the IRS. This reporting ensures that the IRS has visibility into certain types of income received by businesses and individuals.

Income Verification

• Form 1099-K serves as a way for payment settlement entities (such as payment processors and merchant services providers) to verify the income they have processed on behalf of their customers (merchants, businesses, freelancers, etc.). It helps ensure that businesses and individuals accurately report their income to the IRS.

Taxpayer Compliance

• By receiving Form 1099-K, payees are reminded of their tax reporting obligations. They are required to report the income reflected on the form on their tax returns, whether they are businesses or individuals. This helps promote taxpayer compliance.

Backup Withholding

• If a payee fails to provide a valid taxpayer identification number (TIN) to the payment settlement entity, the IRS may impose backup withholding on payments made through payment card transactions or third-party networks. Form 1099-K helps facilitate compliance with backup withholding requirements.

Income Tracking

• Businesses and individuals often use Form 1099-K to help them track their income accurately. This is especially important for businesses that need to calculate their gross receipts for various purposes, including tax reporting and financial analysis.

Audit Trail

• Form 1099-K provides an audit trail for payment transactions. It can be used as documentation in case of IRS audits or inquiries into a payee’s financial activities.

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Who needs to file a 1099-K?

Form 1099-K, “Payment Card and Third Party Network Transactions,” is typically filed by payment settlement entities, such as payment processors and merchant services providers. These entities are responsible for reporting payment card transactions (credit card and debit card) and third-party network transactions to the IRS and to the payees (the individuals or entities receiving the income).

Payment Settlement Entities

• These are entities that facilitate payment transactions made by customers. They can include:
  • Payment processors
  • Merchant services providers
  • Third-party settlement organizations (e.g., PayPal, Square, Stripe)
  • Electronic payment facilitators

Merchant Accounts

• Businesses and individuals who operate merchant accounts or receive payments through payment card transactions and third-party networks may also be required to file Form 1099-K for their payees if they meet certain thresholds.
  • Peer-to-peer payment platform or digital wallet
  • Online marketplace (sale or resale of clothing, furniture and other items)
  • Craft or maker marketplace
  • Auction site
  • Car sharing or ride-hailing platform
  • Real estate marketplace
  • Ticket exchange or resale site
  • Crowdfunding platform
  • Freelance marketplace

Payment Threshold

• The requirement to file Form 1099-K is typically triggered when a payee receives payments exceed $600 and the contributors received goods or services in exchange. (Prior to 2022, Form 1099-K was required if the distributions exceeded $20,000 and 200 transactions) in a calendar year. This threshold is applied separately to each payment card and third-party network.

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Are there any exemptions to filing a 1099-K?

Yes, there are several situations in which you don’t need to file a 1099-K, even if you’ve made payments during the course of your trade or business. Here are some of the exemptions:

Payments to Corporations

• Payment settlement entities are not required to report payments made to corporations on Form 1099-K. This includes payments made to C-corporations, S-corporations, and certain other corporate entities.

Payments to Tax-Exempt Organizations

• Payments made to tax-exempt organizations under Section 501(a) and 501(c) of the Internal Revenue Code are generally exempt from Form 1099-K reporting. However, payments to some tax-exempt organizations may still be reportable, so it’s essential to determine the specific tax-exempt status.

Payments Below the Threshold

• Payment settlement entities are only required to report transactions when the payee receives payments totaling $600 or more in a calendar year. Transactions below these thresholds are not reportable. Prior to 2022, Form 1099-K was required if the distributions exceeded $20,000 and 200 transactions.

Non-Reportable Payments

• Some types of payments are not reportable on Form 1099-K, including:
  • Payments related to the purchase of tangible goods, except for certain payment card transactions.
  • Payments made to a payee that is not a U.S. person (e.g., foreign entities).
  • Reimbursements to a payee for expenses incurred in connection with the payee’s provision of goods or services.

Merchant Reporting Exemption

• Some states have exemptions from Form 1099-K reporting for certain types of businesses, particularly small businesses with low transaction volumes. These state-specific exemptions may vary.

It’s important to note that the responsibility for determining whether a payment is exempt from Form 1099-K reporting often falls on the payment settlement entity. They must evaluate the nature of the payments and the tax status of the payee to determine whether reporting is required.

Payees receiving payments that they believe should be exempt from Form 1099-K reporting should communicate with the payment settlement entity and provide any necessary documentation to support the exemption.

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What is the deadline for filing a 1099-K?

The deadline for filing a 1099-K can vary based on the several factors:

Sending to Recipients

• The 1099-K form should be furnished to the recipient by January 31 of the year following the payment year.

Filing with the IRS

• If you are filing on paper, the 1099-K forms should be submitted to the IRS by February 28 (or the last day of February) of the year following the payment year.
• If you are filing electronically, the deadline extends to March 31 of the year following the payment year.

However, if any of these dates fall on a weekend or a holiday, the deadline may be extended to the next business day. Additionally, if you discover an error after the initial filing, there are separate deadlines for corrected 1099-K forms.

Remember, missing these deadlines can result in penalties, so it’s crucial to stay informed and act timely.

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What is required to file a 1099-K?

To file a Form 1099-K, you will need certain information about both the payer (the person or business making the payment) and the recipient (the person or business receiving the payment). Here’s what is required to file a 1099-K:

Information about the Payer

• Payer’s Name and Address
  • Provide your legal business name and mailing address.
• Payer’s Taxpayer Identification Number (TIN)
  • This could be your Employer Identification Number (EIN) or your Social Security Number (SSN), depending on your business structure. If you’re a sole proprietor, you might use your SSN; if you’re a business entity, you’d use your EIN.
• Payer’s Phone Number
  • Include a phone number where the payer can be reached.

Information about the Recipient

• Recipient’s Name and Address
  • Provide the legal name and mailing address of the individual or business receiving the payment.
• Recipient’s Taxpayer Identification Number (TIN)
  • This could be the recipient’s Social Security Number (SSN) if an individual or their Employer Identification Number (EIN) if a business entity.

Form specific information

• Box 1a – Gross amount of payment card/third party network transactions
• Box 3 – Number of payment transactions
• Box 4 – Federal income tax withheld
• Box 5a – January
• Box 5b – February
• Box 5c – March
• Box 5d – April
• Box 5e – May
• Box 5f – June
• Box 5g – July
• Box 5h – August
• Box 5i – September
• Box 5j – October
• Box 5k – November
• Box 5l – December

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What are the penalties for 1099-K?

Please see the penalties section for details.

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Do you need to e-file a 1099-K?

Please see the e-file section for details.

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Is state filing required for the 1099-K?

Please see the state filing section for details.

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What elements make up a 1099-K form?

The 1099-K contains several boxes, each designed to report specific types of income or information. Here is a breakdown of the boxes on the 1099-K:

Box 1a – Gross Amount of Payment Card/Third-party Network Transactions

This box indicates the gross amount of network payments made during the year.

Box 1b – Card Not Present Transactions

This box indicates all transactions in which a payment card was not used or if the card number was added by default to the terminal.

Box 2 – Merchant Category Code

This box indicates the merchant category code, which is used for payment card/third-party network transactions.

Box 3 – Number Of Payment Transactions

This box indicates the number of transactions processed in the year.

Box 4 – Federal Income Tax Withheld

This box indicates the total federal tax withheld.

Boxes 5a–5l – Monthly Amounts

This box indicates the gross amount of payment card/third-party network payments you’ve processed in the calendar year.

Box 6-7 – State/Payer’s state no

This box indicates the state for which the income and tax details are being reported. It will also include the payer’s state identification number, which is an identifier assigned by the state’s revenue or taxation department.

Please see the state filing section for details.

Box 8 – State tax withheld

If the payer withheld any state income tax on behalf of the recipient, the amount is reported in this box.

Remember, not all boxes will be filled out on every 1099-K form. Only the relevant boxes for the specific payments made will have amounts or indicators.

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Can you correct a 1099-K?

Yes, you can correct a 1099-K. Please see the corrections and negations section for details.