Are you getting a 1099-K? You just might be. Get ready for a little extra paperwork.
I hope you keep detailed records as a home business owner because if you are issued a 1099-K, you'll need them.
It's true that you should have good records regardless, but the 1099-K is likely to cause headaches you didn't expect. And that's even with the IRS delaying the implementation of its latest $600 payment threshold.
What is the 1099-K?
For the most part, people are associating the 1099-K with PayPal. However, other third-party payment processors, including the banks that process debit and credit transactions for your home business, might need to issue you a 1099-K. Venmo, CashApp, and other similar apps are subject to the 1099-K.
The 1099-K ensures that those who do business online report their income. In the past, third-party payment processors are required to issue this form when you have at least $20,000 in transactions and 200 transactions. For the most part, if you don't meet both of those conditions, you probably won't see the 1099-K. In fact, here's what PayPal says about it:
However, there are some states where the threshold for reporting is lower. If you live in affected states and don't reach both thresholds, you could find yourself with a 1099-K.
Who Gets the 1099-K?
The issuer sends a copy to the IRS, and a copy to you, for your records. Just like the 1099-NEC (which replaced the 1099-NEC for many solopreneurs, contractors, and freelancers), the IRS gets a copy, and you get a copy. So it's not exactly a PayPal 1099-K, but it is a form that many people will receive due to carrying on business through PayPal.
Originally, businesses were going to be required to submit a reconciliation if their income didn't match the amount shown on the 1099-K. However, recognizing the burden that would place on many small and home business owners, that requirement has been done away with. But that doesn't mean that you're in the clear.
It's also important to note that the IRS plans to implement a $600 reporting threshold at some point. It was supposed to go into effect for the tax year 2022 but has been pushed back. So, you still won't receive a 1099-K unless you meet the old requirements.
PayPal does provide a handy reconciliation file you can use to help figure things out. Whether you use PayPal's reconciliation or not, it's a good idea to have really good records. I'm always ready to cross-reference my 1099-K information with my records.
Just in case.
3 Things You Should Know about the 1099-K
It's never fun to prepare your taxes — even when you use an accountant as I do. However, it's important to be on top of things. So, as you prepare your home business taxes for the year, here are three things you should know:
1. Some of your income might be double-reported
There is a possibility that your income might be double-reported. This is an issue for me. At the same time, PayPal and Venmo might be sending out a 1099-K to the government, reporting the payments I received, some of my clients — many of whom pay through PayPal or other third-party payment processors — are sending 1099-NEC forms to the IRS.
So some of my income is reported twice, and it looks like I made more than I did. As a result, I am keeping careful track of which income is double-reported.
One of my clients paid me $24,000 over the course of last year. That all came through PayPal. So, of course, now it looks like I made an extra $24,000. I like to note which clients' 1099-NECs are also included with the PayPal 1099-K. You can include it in your reconciliation as well.
The problem is that my PayPal 1099-K shows that I received $109,000 through PayPal. However, about $47,000 of that is duplicated in 1099s sent to me by clients. That's put-you-in-the-next-tax-bracket money.
Double reporting is an even bigger issue with other third-party payment processors. Everyone is used to issuing 1099-NEC forms, but they may not need to do it after all.
2. Your chargebacks and fees won't be reported
The 1099-K only reports your income from third-party transactions. So, if there is a chargeback on a credit card transaction or if you have had fees deducted from your PayPal income, that doesn't show up on your 1099-K.
You need to have records documenting these costs so that if you are audited, you have the proof you need to back up your claim that you paid all of what you owe. I usually take a record of my PayPal statements showing the fees and chargebacks with my tax records for the year. You don't have to send them in with your tax return, but it helps to have them handy in the event you're audited.
And, if you live in one of the states with a lower threshold and use PayPal to sell items, if you meet that threshold, you might still get a 1099-K — even if you didn't make $20,000 and have those 200 transactions. That's no fun because it looks like business income, even though you sell at a loss. You'll have to work with your accountant to resolve the discrepancy.
3. You should be prepared to reconcile your income with the 1099-K
Even though the requirement to submit a reconciliation to your 1099-K with your tax return has been waived, you should still be prepared.
You might be flagged for a tax audit if there is a big enough discrepancy. If this is the case, you will want all of the records available to you, showing allowances, expenses, and fees, as well as copies of the 1099-NEC forms you have that overlap with what's reported on the 1099-K form.
I go ahead and note which 1099-NEC forms are duplicated on a 1099-K. I've also used the handy form provided by PayPal to reconcile those numbers. However, as more of my clients shift to other payment processors, I'm using my own reconciliation process more.
Not All Your Clients Will Issue 1099s
Some of my clients aren't issuing 1099-NEC forms to me because they assume the PayPal 1099-K will take care of it. (Thank goodness! That's something I wish all my clients knew about the PayPal 1099-K.)
The new rules that came into play with the 1099-K tell you to leave out payments handled by third parties.
However, there has been a lot of confusion on this point, so, as a contractor, you still might end up with double-reported income if your clients don't realize the change. I send reminders that I don't need 1099-NEC forms every year, and still, some of my clients send these forms.
And, if you're issuing 1099s, pay attention to the situation. Even though this has been a Thing for several years now, many clients, accountants, and others are still stuck in old habits. You might not actually have to send them out. That's not a bad thing. Less paperwork for you! And your contractors will thank you for not creating more headaches for them.
Before you make changes to issuing a 1099-NEC, check with your home business accountant or a trusted tax professional.
