An official website of the U.S. Govt An official website of the U.S. GovtAs discussed in my previous blog, if you receive money through certain payment apps or online marketplaces, you might get an information return (Form 1099-K, Payment Card and Third Party Network Transactions) from those businesses during the tax filing season that reports the total amount of payments you received through their platform in the prior year.
If you received a Form 1099-K this year and aren’t sure why or if you want to learn how to reduce your risk of receiving an incorrect Form 1099-K in future years, read on to learn a few best practices and how this reporting works.
If you didn’t receive a Form 1099-K this year for transactions in 2023, you might get one next year for transactions in 2024. The number of Forms 1099-K issued should drastically increase over the next few years. According to an estimate in 2023, fully implementing the $600 Form 1099-K reporting threshold – which the IRS plans to do on a phased-in basis – would result in an additional 30 million Forms 1099-K issued per year.
However, the key question is not whether you received a Form 1099-K but rather whether the monies received are taxable. Forms 1099 are information returns sent to you by an entity that paid you certain types of income throughout the tax year. Getting a Form 1099 doesn’t necessarily mean you owe taxes on that income, but you will have to report the income to the IRS on your tax return.
(Although this blog refers to a number of payment apps, neither the IRS nor TAS are endorsing any particular app. Consumers should refer to the company websites and FAQs, not rely on examples in this blog.)
Third-party settlement organizations, which generally include payment apps and online marketplaces, must report on IRS Form 1099-K the gross amount of payments that you receive for goods or services through their platform, subject to the minimum reporting thresholds discussed in my previous blog. Third-party settlement organizations shouldn’t include on Forms 1099-K the payments you receive for other purposes, such as reimbursements or gifts.
It may be simpler for some apps and marketplaces than others to determine when payments are made for goods or services, particularly if an app specializes in facilitating a certain type of transaction. For apps that primarily handle exchanges for goods or services, like selling tickets or providing ride-sharing services, generally all payments would fall into the “goods or services” category and belong on a Form 1099-K.
Where the “goods or services” categorization gets trickier is with apps that process payments for a wide variety of purposes, like Cash App, PayPal, and Venmo. For purposes of Form 1099-K reporting, our understanding is that those apps have developed features to sort out when transactions likely involve payment for goods or services.
With Cash App, PayPal, and Venmo, the most important factor for Form 1099-K reporting is whether you use a business or personal account to receive the payment. According to those apps’ FAQs, they generally report on Form 1099-K any payments sent to business accounts (if you exceed the reporting threshold). They generally do not report payments made to personal accounts, with some exceptions – payers using Venmo and PayPal have the option of marking a payment as a “purchase” even when sending money to a personal account. This purchase categorization results in a fee to the seller for purchase protection and triggers potential reporting on Form 1099-K. If you receive money in your personal account and the payer tags the item as a purchase, the app will likely notify you about it.
The government does not mandate any particular settings or button configurations that apps must use for this purpose so the details will depend on the app you use, and those features could change. To get current information, check the apps’ FAQs or other information they provide.
Another important point is that if you operate a business and accept payment through one of these apps, the IRS has recommended that you create a separate personal account for personal use. Use your business account for business purposes and your personal account to receive payments for personal transactions. Otherwise, personal payments will end up on your business’s Form 1099-K, and you or your tax professional will then have to sort out personal and business payments when preparing your tax return.
If you receive a Form 1099-K that appears incorrect, you can contact the issuer to try to get the form corrected or withdrawn. Before reaching out to the issuer though, keep in mind two issues that may appear to be errors but are not:
If you confirm that your Form 1099-K includes incorrect information, you can contact the issuer to try to correct the error. In many cases, however, you may not be able to timely get the errors corrected or the form withdrawn. When that happens, the IRS FAQs explain how you can report the Form 1099-K error on your tax return and offset any incorrectly reported amounts. Word of advice: Don’t file your tax return late just because you are hoping to correct an error on Form 1099-K – doing so could lead to penalties for failure to timely file. Instead, report the Form 1099-K information on your tax return and zero out the erroneous amounts, as shown in the IRS FAQs and at What to do with Form 1099-K. You should always timely file your tax return to avoid costly penalties.
A Form 1099-K can help you determine whether you owe tax, but the form itself doesn’t give you enough information to make that calculation. To figure out whether you owe tax on any of the transactions you conducted through the app or marketplace that sent you the Form 1099-K, you need to review your personal records, like receipts, and look at the facts and circumstances of the payments to calculate your net profit. Apps and marketplaces generally can’t provide you with your net profit or taxable income because they don’t have data on your expenses, among other limitations.
Note that regardless of whether you receive a Form 1099-K, you have to go through this same process of reviewing the facts and circumstances of payments to determine taxable income on your transactions during the year. In a sense, Form 1099-K is just an additional record to help you determine what tax you owe, if any. The additional wrinkle is that because the IRS also receives a copy of Form 1099-K, you need to fully account on your tax return for all amounts reported on Form 1099-K so as not to trigger automated error detection systems at the IRS, even if the amounts on Form 1099-K are not taxable and you otherwise would not have needed to address them on your tax return. You do this by including the full gross amount listed on Form 1099-K and then making the appropriate offsets to leave only the amount of taxable income (if any).
Form 1099-K might report amounts that the third-party settlement organizations withheld from you during the year and paid to the IRS on your behalf. If so, you would find this amount in box 4 of your Form 1099-K. When you file your tax return, you can get credit for the amount withheld and apply it to the tax you owe or potentially get a refund, just as you would for withholding reported on Form W-2.
Although the IRS generally delayed the implementation of the $600 threshold for most purposes, a third-party settlement organization is required to send you Form 1099-K if it withheld taxes from you in any amount. The main reason a third-party settlement organization would withhold tax is if you haven’t provided them with your Taxpayer Identification Number (TIN), which is generally your Social Security number. If you do not provide a correct TIN, the third-party settlement organization must withhold 24 percent of the amount reportable on Form 1099-K and send that withholding to the IRS.
In the 2023 filing season, roughly 46,000 Forms 1099-K included an amount for federal income tax withholding. The IRS postponement of the reporting threshold last year included a similar exception for withholding, although the wording in that prior IRS notice was less clear as to whether third-party settlement organizations had to issue Forms 1099-K for smaller amounts of withholding ($600 or less).
The IRS plans to take a phased-in approach to enforcing the $600 reporting threshold for Form 1099-K, which means that more and more people should receive these forms in the coming years. If you use apps or online marketplaces to receive payments, it helps to know what to expect on the Form 1099-K and how to avoid potential errors.
If you received a Form 1099-K this filing season, don’t ignore it. The IRS reporting postponement applies only to issuers of Forms 1099-K, not to the taxpayers who receive the forms, and there are various reasons why you might receive Form 1099-K even without reaching the $20,000 and 200 transaction thresholds under prior law. Remember the reporting postponement does not delay the requirement to report income. The reporting postponement was to minimize administrative issues and confusion on behalf of taxpayers, especially for those situations in which a taxpayer may have received a Form 1099-K for personal reimbursement rather than for goods or services. The IRS’s goal in working with the third-party settlement organizations and publishing additional guidance was to eliminate the confusion and erroneous issuance of Forms 1099-K for personal use.
You should report your Form 1099-K information on your tax return, offsetting all non-taxable amounts. This will require you to look to your records and determine how much, if any, of the gross amount on the Form 1099-K represents taxable income. If the third-party settlement organization withheld tax on your behalf, claim the withheld amounts on your tax return.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.