Most people are aware of the 1099 forms that are required if they were paid as a contractor or consultant (i.e., not as an employee), received interest or dividends, or own a rental property. If you’ve been taking online or credit card payments for your business, you may also be familiar with the 1099-K, which is issued by payment processing providers. Until the end of 2021, the IRS had set the limit for requiring processors to issue 1099-Ks at $20,000 or 200 transactions in a year, but this has changed for 2022, and for many of you reading this, you will see your first 1099-K in January 2023 as a result of these changes.
Let’s start with some basics. Form 1099 is one of several IRS tax forms used to report income other than wages, salaries, and tips. There are different versions of the 1099 form which are used to report different types of income, such as rental property income, interest and dividends, sales proceeds, and payments received as a contractor. The business must report payments of these types using a 1099 form whenever you are the payor and those payments totaled $600 or more in a calendar year.
Before 2022 card processing companies were required to provide their customers with 1099-K forms whenever the total transaction amount for the year was $20,000 or higher or the number of total transactions was 200 or more. Beginning in 2022, however, all payment processing services are required to report amounts you receive through their platform or service when those payments total $600 or more – with no minimum number of transactions. If you had previously been below the $20,000/200 transaction minimums, you will receive your first 1099-K in January 2023 (for the 2022 tax year). This change makes accurate record keeping more important than ever before.
The gross amount shown on the 1099-K is the total dollar amount of the payment transactions made to you. This amount is not adjusted to account for any fees, refunds, or any other amounts that you pay for using that service (including refunds to clients). The form does, however, show any fees paid on your behalf by others, such as when a payor also pays the processing fee, even if those fees are deducted before payment reaches you. This means that your 1099-K will include those expenses, reporting an income higher than you received.
You need to keep accurate records of the fees you pay and understand how and when to deduct them when you file your taxes. It is confusing, especially when you have many such transactions, so a good tax accountant and bookkeeper are invaluable if you want to avoid overpaying your taxes. By the way, even those companies that have already been receiving 1099-K forms may be overreporting revenue – and overpaying taxes – as a result of misunderstood 1099 reporting rules.
If you’d like us to check to see if you overpaid your taxes last year, set up a conversation on my online calendar. It can be found here, or you can just call us.