1099-K: The Basics
Tax season requires some planning and organization for everyone, and this is especially true when you are self-employed. On top of keeping track of business-related expenses, you’ll likely need to track income streams from several clients.
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Form 1099-K keeps track of payments you received through a Payments Settlement Entity, or PSE. Includes tracking of payments made via:
- credit cards
- Online payment services like PayPal
- And even freelance platforms like Upwork that manage customer payments on your behalf.
Form 1099-K shows the value of the transactions that PSE has processed on your behalf in the past year, as well as any expenses paid on your behalf by your clients.
The IRS requires each payment settlement entity to send you a Form 1099-K by January 31 For companies and individuals who have crossed the threshold of the year. For tax years before 2022, the minimums are payments totaling at least $20,000 and at least 200 transactions. For tax years from 2022 onwards, the minimum is simply $600 in payments without any regard for the number of transactions.
But you can still receive 1099-Ks from some PSEs even when the IRS does not require the form. Many PSEs send 1099-Ks to all of their sellers, even if they only process a few transactions and don’t reach the threshold.
Use Form 1099-K to prepare your taxes
You will need to keep all of your 1099-K forms to prepare for tax time since each form reports a portion of your self-employment income for the year. Use the information on the 1099-Ks with your books and other records to determine your annual income. But remember that just because you didn’t receive a Form 1099-K doesn’t mean you don’t have to report all of the income you received.
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if I were solopreneur or sole proprietor, your 1099-Ks count toward your self-employment income, which is subject to self-employment tax. Register the information from your 1099-Ks as income on table c.
If your customer pays some expenses on your behalf—for example, a deducted processing fee even before the payment reaches you—the 1099-K should include those expenses, reporting higher income than you actually received. do not worry. You can deduct these fees as business expenses at table c So your tax obligations will accurately reflect your income.
Don’t confuse financial and personal business
Payment settlement entities (PSEs) cannot distinguish between business payments and personal payments, so you shouldn’t confuse the two. Make sure not to accept payments for personal expenses on the same accounts that you use for business expenses.
For example, say a relative wants to send you $100 on your birthday and uses your credit card reader to do so. PSE cannot know 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.
Although you don’t have to claim this gift as income, any discrepancies between the income reported on your 1099-Ks and the income you report to the IRS may send red flags, which could lead to an audit. Avoid headaches by using your company’s PSEs only for business transactions.
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