What is 1099-K? Definition and who files it

Taxes are a fact of life, especially for business owners. Dealing with taxes can be daunting, particularly if you don’t have experts to submit them for you like large companies do. You’ll need to know what forms to complete and how to maintain tax compliance.

In the United States, this means familiarizing yourself with the Internal Revenue Service’s regulations. There’s one form in particular to take notice of: Form 1099-K. This form is crucial for any business that accepts payment via credit cards or third-party processors.

So, what is a 1099-K? Let’s dive in. 

Defining Form 1099-K

Form 1099-K is a U.S. tax document that reports income from third-party payment processors (e.g., PayPal or Venmo) and credit cards (e.g., Mastercard or Visa). This also includes income from online marketplaces and crowdfunding platforms. Form 1099-K’s full name is Payment Card and Third-Party Network Transactions.

What is a 1099-K form used for? Its purpose is to track the income of 1099 employees, small businesses, gig workers, and freelancers to ensure that their earnings are correctly reported to the IRS.

When was Form 1099-K implemented? 

Form 1099-K was first instituted in 2012 as part of the 2008 Housing and Economic Recovery Act (even though it’s not related to housing) to be applied to the 2011 tax year. 

This was in response to a massive $450 billion in underpaid taxes—a 17% noncompliance rate. The form is one way to increase tax law adherence. 

When should a 1099-K be filed? 

Companies that process payments—such as credit card issuers, digital payment platforms, and online marketplaces—must complete Form 1099-K and submit it to the IRS by the last day of February (if filing by paper) or by March 31 (if filing electronically) in the year following the transactions.

How does a 1099-K work?

A 1099-K works by cataloging the annual gross transactions made through third-party processors or payment cards.

It covers all business transactions but doesn’t include nontaxable payments made via a payment card or processor. Imagine you stop at the grocery store on the way to visit your friend, and they ask you to get a few items for them. They then pay you back using Venmo. This would not need to be reported on a 1099-K. 

It’s best to keep business payments separate from personal ones so you can distinguish between taxable and nontaxable payments. You don’t want to pay the 1099-K tax rate on transactions between family and friends.

You should receive Form 1099-K from your payment card or payment processing company by January 31 each year. This form is also sent to the IRS for its records, ensuring you report all of your income. Each company will send its own 1099-K. So, if you sell on Amazon and Etsy, fundraise on Kickstarter, and list a property on Airbnb, expect to get a separate form from each company.

Do I have to report 1099-K income?

So, who needs a 1099-K? The following people are likely to need this form for their annual tax filing:

• Freelancers accepting online payments: Maybe you’re a copywriter, musician, or web designer doing part-time or freelance work for various companies. No matter what you do, you’ll need a 1099-K if you’re paid via an online processor like PayPal.
• Small business owners processing credit card transactions: Do you run a shop, salon, or similar in-person business and accept direct credit card payments? You’re a candidate for a 1099-K.
• Gig economy workers: Ridesharing and delivery services like Uber and Lyft must send you the form if you meet certain transaction thresholds (more on that in a moment).
• Online sellers: You sell through a marketplace like Etsy, Amazon, or eBay.
• Rental property owners listing their properties online: Maybe you rent out a holiday home through Airbnb or VRBO. Expect a 1099-K if you meet the requirements.

What is the 1099-K threshold? 

The 1099-K threshold varies from state to state and year to year. These thresholds only apply to third-party payment processors. Payment card transactions, such as credit card swipes, do not have a minimum requirement. 

In the 2024 tax year, the threshold is $5,000 across any number of transactions. The IRS is applying a phased-in approach as they move to a $600 minimum. Note that these are only thresholds for receiving Form 1099-K. The IRS requires taxpayers to report and pay tax on all income.

In previous years, the 1099-K threshold was $20,000 across at least 200 distinct transactions. This steep decline is due to the American Rescue Plan Act of 2021, wherein Congress changed the tax reporting threshold.

It’s unclear when the IRS will institute the $600 threshold—it hasn’t yet announced plans to do so.

Differences between 1099-K, 1099-NEC, and 1099-MISC

Comparing 1099-K versus 1099-NEC versus 1099-MISC is pretty straightforward. Here are the primary differences: 

• 1099-K: Third-party and card payment transactions. This form is for gig economy workers, freelancers, and small businesses that accept these payment types.
• 1099-NEC: Non-employee compensation. The IRS reintroduced this form in 2020 to handle non-employee compensation, such as payments to independent contractors, freelancers, consultants, and U.S. nationals living abroad. 
• 1099-MISC: Miscellaneous income, such as rent and prizes. Before the introduction of the 1099-K, many business owners had to send this form to their suppliers if they paid them $600 or more in a tax year. Now, anything on the 1099-MISC that’s also on the 1099-K must only be reported on the latter form to avoid double taxation.

Stay compliant with Oyster

Managing tax requirements can be overwhelming, especially when you run a business that operates in multiple countries. Fortunately, Oyster is here to simplify your international payroll and tax compliance. With our global employment platform, you can handle complex tax forms and third-party payments in over 180 countries, ensuring that you comply with international tax regulations.

Let Oyster take care of the details so you can focus on growing your business.

FAQs

Still have questions about Form 1099-K? We’ve got you covered.

Do 1099-K thresholds vary by state?

Yes. Some states, such as Massachusetts, Vermont, and Virginia, have already adopted the lower $600 threshold. Others, like Arkansas, have adopted a $2,500 threshold. Some, like Colorado, have adopted a $0 minimum. Double-check your state’s tax laws.

What if the 1099-K amount doesn’t match my records? 

Your 1099-K might be incorrect for various reasons. It may include nontaxable income, or the reported gross amount may be inaccurate. 

You have two basic options when your 1099-K is incorrect:

• Request a corrected form from the issuer. The company’s name and telephone number should be on the provided form. 
• Report the amount from your incorrect Form 1099-K on Part I of Schedule 1 (Form 1040)—Additional Income and Adjustments to Income—and note the error. Then adjust it on Part II.

How do I avoid paying 1099-K taxes? 

You typically can’t avoid paying 1099-K taxes. However, the income on your form could be nontaxable. As previously mentioned, personal transactions between friends and family (non-business related) don’t count as taxable income.

You may also be able to deduct income for items sold at a loss. In this instance, it’s best to consult a tax professional.

People who don’t receive a 1099-K because they’re under the threshold still need to report their nonemployment income to the IRS.

Who is exempt from 1099s?

1099s are used to report income from nonemployment sources to the IRS. Therefore, only people who don’t work for themselves in some capacity are exempt from 1099s. However, a taxpayer might get a 1099 if they received cash payments or dividends for ownership of company stock.

Do I need to issue a 1099-K for my employees or contractors?

You don’t need to issue a 1099-K for full-time and statutory team members. Instead, they need Form W-2. Conversely, you’ll issue a 1099-NEC to contractors. Only payment processors, credit card companies, and online marketplaces send out 1099-Ks.