Small Business Owners & Form 1099-K: What You Need to Know

If you’re a business owner, freelancer, independent contractor, or otherwise self-employed, you may have already heard about Form 1099-K. While the form was first introduced in 2011, it’s made headlines in recent years for drastic changes in its reporting thresholds — which have changed yet again for 2024.

Below, we’ll walk you through the basics of Form 1099-K — what it is, who sends and receives it, and how to report its contents — as well as the latest updates. 

What is Tax Form 1099-K?

Form 1099-K: Payment Card and Third-Party Network Transactions is for disclosing business-related transactions through online platforms, apps, and other third-party payment processors. This includes payments from:

• Credit and debit cards, e.g. Visa, MasterCard, American Express
• Other stored value cards, e.g. Visa gift cards, pre-paid debit cards
• Payment platforms and apps, e.g. Stripe, Shopify, Square, PayPal
• Apps and online marketplaces that manage payments on the payment recipients’ behalf, e.g. Upwork, Etsy, Airbnb

These third-party processors will send a Form 1099-K to anyone who has received payment transactions through their platform exceeding that year’s threshold. In turn, Form 1099-K recipients must report those payments as part of their income.

Do I have to send a 1099-K tax form to contractors I pay through a third-party payment system?

No. Only third-party payment processors themselves are responsible for sending a Form 1099-K. So if you, say, paid an independent contractor $10,000 through Stripe, the independent contractor will receive a Form 1099-K from Stripe — not from you.

You will, however, have to send them a Form 1099-NEC if you paid them more than $600 per year through other payment options, like cash or checks.

Tax form 1099-K reporting thresholds

For tax year 2024, anyone who has earned over $5,000 through a particular third-party payment should expect to receive Form 1099-K. It’s worth noting, however, that Form 1099-K reporting thresholds refer only to business-related transactions.

A few examples of people who would receive a Form 1099-K include:

• A freelancer who received $12,000 through Bill.com
• An online retailer that received $30,000 in payments through MasterCard
• A nanny who received $20,000 from her employer through PayPal 

A few examples of people who would not receive a Form 1099-K include:

• A father who sent $10,000 to his daughter via Zelle for college expenses throughout the year
• An independent contractor who earned $3,000 through Upwork and $3,000 through Fiverr
  • Although their total payments exceeded $5,000, they did not receive more than $5,000 from any one platform. While they would still have to report their income from these platforms on their tax return, they would not receive a Form 1099-K from either one
• An expat who paid her partner $6,000 through Venmo for shared living expenses

Threshold updates over the years

For many years, the 1099-K threshold was $20,000 across more than 200 transactions. However, President Biden’s COVID-19 stimulus package — aka the 2021 American Rescue Plan Act — lowered this threshold to just $600, regardless of how many transactions you receive it across.

This was part of Biden’s efforts to close the tax gap — the difference between what people truly owe the IRS and what they actually pay in taxes. By lowering the 1099-K reporting threshold, the government receives greater visibility into the online payments American taxpayers receive — thus making tax enforcement easier.

After considerable pushback to the drastic change, the IRS announced in December 2022 that they would delay enforcement until tax year 2023. In November 2023, however, they announced they would delay the threshold update yet again until 2024. The IRS also changed the reporting threshold from $600 to $5,000 as a plan to phase-in the lower 1099-K threshold.

Understanding Form 1099-K

Beyond basic tax information like the vendor’s address, transaction type, and payer/payee tax identification numbers (TINs), Form 1099-K includes a breakdown of your payments from a given vendor:

• Box 1a — Gross amount of payment card/third-party network transactions: The total payments you received from the vendor throughout the tax year, excluding deductions like refunds and fees
• Box 1b — Card Not Present transactions: The total of any payments you received where a customer or client didn’t physically present you with a payment card (e.g. online purchases, phone orders)
• Box 2 — Merchant category code: The four-digit number payment processors companies use to classify merchants. You can find some common examples here
• Box 3 — Number of payment transactions: The total number of transactions processed through the vendor in the tax year, excluding refunds and chargebacks
• Box 4 — Federal income tax withheld: The taxes the federal government withholds from your transactions
  • Note: Depending on the type of transaction, this field may be blank
• Boxes 5a – 5I — Gross amount of payment card/third-party network transactions made: The total payments you received from the vendor for each month in the calendar year
• Box 6 — State: The state or states in which your transactions occurred
• Box 7 — State identification no.: The number the vendor uses for state tax reporting
• Box 8 — State income tax withheld: The taxes withheld by a state or states on your transactions

After receiving a Form 1099-K, it’s a good idea to cross-reference the numbers on the form with your business records (e.g. bank account statements, accounting software) to ensure accuracy. If you notice a discrepancy, it’s important to contact the issuer directly.

You can reach out to the vendor through the contact information they’ve included on the form or via their usual customer service channels. Make sure to have documentation to back up your claim as necessary.

Tax implications

Form 1099-K shouldn’t have any impact on your taxes as long as you’ve been properly reporting all of your income. That’s because Form 1099-K does not, in itself, levy a tax on payments received. Rather, it provides you with information you need to include on your tax return.

How to report Form 1099-K on your tax return

You’ll report the gross payment amount from Box 1a on Form 1099-K — along with any other relevant income — on various forms according to the type of income and your filing status. These may include:

• Form 1040: Main income tax form for individuals, sole proprietors, and single-member LLCs
• Schedule C: For reporting business profit and loss
• Schedule SE: For calculating self-employment tax
• Schedule 1: For reporting additional income and adjustments not included on Form 1040
• Schedule E: For reporting supplemental income and loss related to real estate, royalties, partnerships, S corps, estates, trusts, and Real Estate Mortgage Investment Conduits (REMICs)
• Form 1120: Main income tax form for C corps
• Form 1120-S: Main income tax form for S corps
• Schedule M-1: For C corps and S corps that need to reconcile the differences between their financial statements and taxable income
• Form 1065: Main income tax form for partnerships
• Schedule K-1: For reporting a partner’s share of income
• Form 8949: For reporting the sale and disposition of capital assets 
• Schedule D: For reporting and calculating the tax implications of capital gains and losses

Keep in mind that this isn’t a comprehensive list — the exact forms you must file depend largely on income type, filing status, entity type, and other factors. To ensure total compliance, it’s best to work with a tax professional. 

Resources:

1. Understanding your Form 1099-K
2. The IRS reminds Americans earning over $600 on PayPal, Venmo, or Cash App transactions to report their earnings
3. What you need to know about next year’s $600 reporting rule from the IRS
4. IRS announces delay in Form 1099-K reporting threshold for third party platform payments in 2023; plans for a threshold of $5,000 for 2024 to phase in implementation