Updated: Jun 19
Receiving a Form 1099-K can be confusing, especially if you're not sure how to handle it on your tax return. This article will explain what Form 1099-K is, how to report the income on your tax return, and how to save money on your 1099-K income. So let’s get started!
1. What is Form 1099-K?
Form 1099-K, also known as the Payment Card and Third Party Network Transactions form, is an informational tax document sent by payment settlement entities (PSEs) to report certain payment transactions made through their networks. PSEs include credit card companies, payment processors, and online platforms such as PayPal or eBay. If you're a seller or service provider who received payment through these networks, you may receive a Form 1099-K.
The IRS requires PSEs to issue a 1099-K if you meet the following thresholds in a calendar year:
For returns for calendar years prior to 2022:
Gross payments that exceed $20,000, AND
More than 200 such transactions
For returns for calendar years after 2022:
Gross payments for goods or services that exceed $600, AND
Any number of transactions
It's important to note that Form 1099-K reports the gross amount of transactions, which includes sales, fees, refunds, and chargebacks. This means the amount reported on your 1099-K may not match your net income.
2. How to Report 1099-K Income on Your Tax Return
To report the income from your 1099-K, you'll need to complete the appropriate tax forms based on your business structure. Here are the most common forms you'll use to report 1099-K income:
Schedule 1 (Form 1040): This is the most straightforward and basic way to report 1099-K income, but this doesn’t allow for any tax planning or savings unfortunately. You can only claim expenses up to the amount of your income - no losses allowed.
Schedule C (Form 1040): Sole proprietors and single-member LLCs use this form to report their business income and expenses. In most cases, you can take a loss if you expenses exceed your income from the activity.
Form 1065: Partnerships use this form to report income and expenses, with individual partners reporting their share of the income on their personal tax returns.
Form 1120: Corporations use this form to report their income and expenses.
When reporting 1099-K income, you'll need to account for business expenses, refunds, and other adjustments to accurately report your net income. This is where maintaining accurate records throughout the year becomes essential.
3. How to Save Money on 1099-K Income
Here are some strategies to help you save money on your 1099-K income:
Deduct business expenses: Make sure to claim all eligible business expenses on your tax return. These expenses can include supplies, advertising, travel, and more. Keeping detailed records of your expenses will help you maximize your deductions.
Use tax credits: Research tax credits that may apply to your business, such as the Small Business Health Care Tax Credit, Work Opportunity Tax Credit, or Research and Development Tax Credit. These credits can directly reduce your tax liability.
Contribute to retirement accounts: Contributions to retirement accounts like a SEP-IRA, SIMPLE IRA, or 401(k) can lower your taxable income, reducing your tax liability.
Hire a tax professional: A tax professional can help you identify additional deductions, credits, and strategies to minimize your tax liability.
Form 1099-K can be a blessing in disguise if you plan properly
Receiving a Form 1099-K can be overwhelming, but understanding how to report the income and take advantage of money-saving strategies can make the process easier. If you need help navigating your tax obligations or want personalized advice on how to save money on your 1099-K income, consider scheduling a free consultation with Iota Finance. Our team of tax professionals is ready to help you make sense of your 1099-K and ensure you're fully compliant while maximizing your savings.