Many small businesses accept credit cards, debit cards, and money transfer app payments as payment options when customers purchase goods and services. If you're among them, you will likely receive Form 1099-K, which reports your gross transactions to the IRS.
Understanding Form 1099-K, including verifying its accuracy and using it to properly report your income, is crucial. Here's what you need to know to stay compliant and avoid tax surprises.
What is a 1099-K form?
A 1099-K form is issued by credit card companies and third-party settlement organizations (TPSOs) — think payment apps and online marketplaces (like Etsy and eBay) — and are reported to the IRS each year. TPSOs are also required to send you a copy of the 1099-K form by January 31 each year if they have reported income on your behalf.
If your small business receives any of the following forms of popular payment types — and meets income threshold requirements — you can expect a 1099-K form:
- Debit cards
- Credit cards
- Gift cards
- Venmo
- Cash App
- PayPal
If you've used Venmo, PayPal, or other money transfer services for personal transactions, don't be alarmed: Payments labeled for "family and friends" on these platforms are not subjected to 1099-K reporting, since the payments can be easily differentiated from business transactions.
[Read: Understanding Peer-to-Peer Payment System Income Tax Reporting for Small Business]
Income thresholds for 1099-K forms
In recent years, there has been confusion about the reporting thresholds for 1099-K forms — especially after the IRS announced a phased-in reporting plan and later delayed TPSO reporting thresholds until tax year 2024.
TPSOs will issue you Form 1099-K in the following phased-in approach:
- Year 2024: If you received over $5,000 in aggregated payments for goods/services.
- Year 2025: If you receive over $2,500 in aggregated payments for goods/services.
- Years 2026 and beyond: If you receive over $600 in aggregated payments for goods/services.
Your business could receive more than one Form 1099-K. For example, if your business accepts payments on both Etsy and Amazon and you receive over $2,500 in payments on both platforms in 2025, you will receive two forms reporting the payments.
The IRS warns, however, that you may still receive Form 1099-K during the phased-in approach that amounts to less than the outlined threshold. This is because payment processing companies are required to report all payments made using credit, debit, or prepaid cards, regardless of the amount.
[Read more: 5 Types of Tax Forms Every Small Business Owner Should Know]
If you've used Venmo, PayPal, or other money transfer services for personal transactions, don't be alarmed: Payments labeled for 'family and friends' on these platforms are not subjected to 1099-K reporting, since the payments can be easily differentiated from business transactions.
What to do if you receive a 1099-K form
If you receive Form 1099-K, ensure the information outlined is correct. You should be sure Form 1099-K is intended for you by checking the identification number. Once you establish the form is intended for you, use the reported income amount along with other amounts received in the form of cash, checks, and debit/credit payments when calculating your gross income. Make sure you keep documentation of all sources of income and deductions you report on your income tax return.
Whether or not you receive a 1099-K form from your payment processing apps, you should always report accurate business income to the IRS.
How to correct inaccurate information on a 1099-K form
Receiving a Form 1099-K that is incorrect can be concerning, but it is typically a quick fix. According to the IRS, here are some common errors you might find on your 1099-K form:
- The gross amount and/or number of transactions is incorrect.
- The merchant category code does not match your business.
To ensure your reported income is correct, the IRS recommends that you confirm your payment card receipt records and merchant statements match the amount on your Form 1099-K.
If you find any errors on your 1099-K form, whether it's a misspelling of your name, a wrong tax ID, or a reporting inaccuracy, you can request a new form from the payment settlement entity (PSE) listed on the form. Be sure to keep a copy of the corrected form and your associated correspondence with the PSE.
For those who have received a Form 1099-K in error, which can happen when payments between friends and family are reported, the IRS instructs you to contact the issuer of the 1099-K immediately.
If any Form 1099-K errors cannot be corrected or will not be received by the tax filing date, they should be listed on Schedule 1 (Form 1040). In Part I, Line 8z, list the amount as "Other Income – Form 1099-K Received in Error" to acknowledge its receipt. Then in Part II, Line 24z, enter the same amount as "Other Adjustments – Form 1099-K Received in Error" to offset the incorrect income. This will effectively nullify the incorrect report on your taxable income.
Again, keep records of any communications with the Form 1099-K issuer regarding the error in case you receive inquiries in the future from the IRS.
What to do if the reported 1099-K total gross payment does not belong to you
In certain cases, you may receive a Form 1099-K, but the total gross payment listed does not belong to you. According to the IRS, the following example scenarios can help you determine how to account for the misallocated gross payment. In all instances, save any correspondence.
- If you report your business income using Forms 1120, 11205, or 1065 and receive a Form 1099-K in your name, contact the PSE listed on the form and request a corrected Form 1099-K that uses the business's taxpayer identification number (TIN). Request that the TIN appear on all future Form 1099-Ks.
- If you share a credit card terminal with another person or business, you will see transactions on your Form 1099-K that don't belong to you. File the appropriate information on a return for each person or business with whom you shared the card terminal. Save records of payments issued to each person sharing your terminal and include canceled checks and written agreements.
- If you bought or sold your business during the last year, there may be transactions listed from the prior or new business owner. This can occur when the TIN and business name associated with the credit card terminal are not updated. Contact the PSE to request a corrected Form 1099-K.
- If your business structure changed during the year and you continued to use the same card terminal, your Form 1099-K will not have the correct tax return. Notify your merchant acquirer of changes to the name or TIN of the business.
- If you allow customers to receive cash back on debit card purchases, maintain all records of this activity. Cash back should not be reported as a payment transaction.
- For businesses that have multiple sources of income, income may be reported on multiple returns. If you process payments using the same credit card terminal, your Form 1099-K will include all of the businesses' gross payment card receipts. Use your records to confirm that gross receipts are separated and reported on the appropriate line or schedule.
Do I have to pay taxes on the reported transactions on Form 1099-K?
If you are worried about new taxable income due to the changes in reporting thresholds for TPSOs, know that this largely depends on your business's specific situation. Since Form 1099-K reports gross transactions, not all of those amounts are necessarily taxable. For example, if you sold personal items at a loss, you can report it on Schedule 1 or Schedule D, and you won't owe taxes.
However, if the sales are related to a business or hobby, you may need to include the reported amount in your gross receipts. Ultimately, only net income — after accounting for expenses, refunds, and fees — is taxable, so it's important to have accurate bookkeeping processes.
[Read more: A Complete Guide to Filing Your Business Taxes]
Emily Rosman and Sammi Caramela contributed to this article.
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