As part of the American Rescue Plan of 2021, the reporting threshold for business transactions changed for third-party settlement organizations (TPSOs) to $600. Previously, companies were required to report transactions on a Form 1099-K for a payee who exceeded 200 transactions of over $20,000. However, due to concerns over its sudden implementation, the IRS has decided to delay the threshold change until the 2024 tax filing season.
This year’s filing season will be used as a “transition period,” according to the IRS. This will give TPSOs time to become compliant with the new threshold and give payees time to understand how this will impact reporting processes. For those who will receive Form 1099-K, the following information and guidelines will clarify the process.
What is reported on a 1099-K form?
A Form 1099-K reports the gross amount of payment transactions from credit cards, digital payments via third-party networks (like Venmo and PayPal), and other freelance platforms that manage payments between two parties. Form 1099-K will only report third-party network transactions if they exceed the minimum threshold of $20,000 and 200 transactions. Businesses will receive 1099-K forms from each payment settlement entity they’ve used in the prior calendar year.
Keep in mind, this only applies to business transactions and does not include “personal” payments, like sending your roommate rent money or splitting a dinner bill with a friend on Venmo. On sites like PayPal, you can differentiate “family and friends” payments versus business transactions to ensure the platform categorizes payments correctly.
[Read: Understanding Peer-to-Peer Payment System Income Tax Reporting for Small Business]
Income thresholds for 1099-K forms
The anticipated change to a $600 threshold will affect many businesses and drastically increase the number of Form 1099-Ks issued. The prior sales threshold of $20,000 and an excess of 200 transactions meant that businesses didn’t have to think too much about differentiating personal and professional expenses. With the new, significantly lower threshold, businesses that use third-party payment apps like Venmo or Cash App for both business and personal expenses will need to be more aware of designated spending.
These TPSOs must automatically report to the IRS when the threshold has been reached. The delay until 2024 will give businesses more time to separate personal and professional accounts and track spending so they don’t unintentionally trigger a Form 1099-K.
Who issues 1099-K forms?
Payment settlement entities like PayPal must report all payments made in settlement of payment card transactions (e.g., credit cards) and third-party network transactions (if exceeding the minimum threshold, which remains $20,000 or 200 transactions until the tax year 2024 when the threshold changes to $600).
Businesses will receive a Form 1099-K if they earned over $20,000 in commercial transactions through payment apps like Venmo, Uber Eats, PayPal, Cash App, Qualpay, and other popular services, and there were over 200 transactions. These third-party networks will issue the forms themselves, and separate payments made through other accounts will not be counted toward these totals. For instance, if a merchant receives payment through an account serviced and funded directly from American Express, American Express will do the reporting.
These third-party settlement organizations will report both single transactions over the threshold and multiple transactions that equal that threshold.
[Read: Choosing the Right Payment Methods to Accept at Your E-Commerce Business]
Businesses will receive a Form 1099-K if they earned over $20,000 in commercial transactions through payment apps like Venmo, Uber Eats, PayPal, Cash App, Qualpay, and other popular services, and there were over 200 transactions.
How to correct information on a 1099-K form
Receiving a Form 1099-K that holds incorrect information 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 form doesn’t belong to you or is a duplicate.
- Your taxpayer identification number (TIN) is incorrect.
- The gross amount and/or number of transactions is incorrect.
- The merchant category code (MCC) 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 your form. Just be sure to keep a copy of the corrected form and your associated correspondence with the PSE. You can also contact the filer, whose name and contact information should appear in the upper left-hand corner of the form. If the error cannot be corrected, it should be listed on Schedule 1 (Form 1040).
For those who have already received a Form 1099-K in error, before the implementation of the delay, the IRS is working quickly to provide information and instructions so taxpayers understand what to do.
What to do if you receive a 1099-K form
If you receive a Form 1099-K, use the reported amount of income, along with other amounts received in the form of cash, checks, and debit/credit payments when calculating your gross income during tax season. 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 be reporting accurate business income to the IRS.
What to do if the 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 TIN. Request that the TIN appears 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 both businesses' gross payment card receipts. Use your records to confirm that gross receipts are separated and reported on the appropriate line or schedule.
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