1099-K: The Basics
Tax season requires some planning and organization for everyone, and this is especially true when you’re self-employed. On top of tracking business-related expenses, you’ll need to track income streams from multiple customers.
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Form 1099-K tracks payments you received through a payment settlement unit, or PSE. This includes tracking payments made through:
- Credit Card
- Online payment services like PayPal
- And even freelancing platforms like Upwork that manage client payments for you.
Form 1099-K shows the value of transactions processed by the PSE for you in the past year as well as any expenses your customers paid on your behalf.
The IRS requires each payment settlement entity to send you a Form 1099-K. 31 January For businesses and individuals that have exceeded the limit for the year. For tax years prior to 2022, the limit is a total payment of at least $20,000 and at least 200 transactions. The limit is only $600 in payments without consideration for the number of transactions for the tax years beginning 2022 and going forward.
But you can still get 1099-KS from some PSEs even if the form is not required by the IRS. Many PSEs send 1099-KS to all their vendors, even if they have processed only a few transactions and are well below the limit.
Using the 1099-K Form to Prepare Your Taxes
You’ll need to keep all of your 1099-K forms with you for tax time preparation because each form reports a portion of your self-employment income for the year. Use the information in your 1099-KS along with your other books and records to determine your annual income. But remember that just because you didn’t receive a 1099-K form, it doesn’t mean you don’t need to report all of the income you received.
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if you are one solopreneur or sole proprietor, your 1099-Ks are included in your self-employment income, subject to self-employment tax, Record the information in your 1099-KS as your income Schedule C,
If your customer pays certain expenses on your behalf—for example, processing fees deducted before the payment reaches you—your 1099-K must include expenses that exceed the income you actually received. Report income. Don’t worry. You can deduct those charges as your business expense. Schedule C Therefore your tax liability will accurately reflect your income.
Don’t mix business with personal finance
Payment Settlement Institutions (PSEs) cannot differentiate between business payments and personal payments, so you should not mix the two. Make sure you don’t accept payments for personal expenses on the same accounts you use for business expenses.
For example, let’s say a relative wants to send you $100 for your birthday and uses your credit card reader to do so. The PSE cannot state that it is a personal gift rather than a business transaction. As a result, the gift is included in the total shown on your Form 1099-K.
While you don’t have to claim that gift as income, any discrepancies between the income reported on your 1099-KS and the income you reported to the IRS could send red flags, potentially leading to an audit. can trigger. Avoid headaches by using your business PSUs only for business transactions.
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