What is Tax Form 1099-K

What is Tax Form 1099-K?

Form 1099-K is the newest of the 1099 IRS forms (there are 15 of them!). It was first introduced ten years ago but didn’t make its first appearance until 2011.

Because it’s so new, form 1099-K can cause a lot of confusion. So, let’s break it down and talk about what it is and why you might get one this coming tax season.

What is Tax Form 1099-K?

Form 1099-K is used to report certain types of transactions to the IRS. It reports payments

  • from a payment card transaction (like a debit card or credit card); and/or
  • in settlement of third-party payment network transactions, above minimum thresholds of
    • $20,000 in gross payments and
    • 200 transactions.

Form 1099-K will be filed and sent by a payment settlement entity (PSE). You’ll receive a copy either from a merchant acquiring entity (MAE) or a third-party settlement organization (TPSO). It just depends on how you received payments.

Merchant Acquiring Entity

An MAE is a company contractually obligated to pay you (the merchant) for payment card transactions you processed. So, if you’re a retailer who accepts credit cards through a point-of-sale (POS) system, you might receive a 1099-K from your credit card processor.

Payment card transactions include any transaction where a payment card or data associated with a payment card (like the account number) was accepted as payment.

Unlike third-party payment network transactions, there are no minimum thresholds. If you only accepted one credit or debit card this year, you will still receive a 1099-K in 2019.

Third-Party Settlement Organization

TPSOs are a little more complicated than MAEs. If you work with a TPSO, you have an agreement where the TPSO will handle the payments between you (the seller) and the purchaser.

To be considered a TPSO by the IRS, the company you work with must include:

  • the establishment of accounts by a significant number of unrelated parties,
  • an agreement between the company and sellers to settle transactions,
  • the establishment of standards and mechanisms for settling transactions, and
  • a guarantee that the sellers will be paid.

One of the most familiar examples of a TPSO is eBay. When you sell items on eBay, eBay collects payments from your buyer, then transfers those funds into your account.

Why Would I Receive Tax Form 1099-K?

There are several reasons you might receive a 1099-K. You might receive one if, in the prior calendar year, you

  • received payments by credit card, debit card, or other payment cards through your POS system;
  • sold items on eBay or similar auction sites;
  • drove for companies like Uber or Lyft;
  • performed freelance work through sites like Upwork or Task Rabbit; or
  • sold merchandise on Etsy.

When Will I Receive It?

If your PSE is required to send you a 1099-K for 2018, they must send it to you by January 31, 2019.

If they’re paper filing the form, they must send it to the IRS by February 28, 2019. And, if they are e-filing the form, they must file it by March 31, 2019.

How Do I Read Tax Form 1099-K?

A 1099-K will include the gross amount of all reportable transactions. It will not include any adjustments for credits, cash equivalents, discount amounts, fees, or refunds.

When you receive your form, what exactly are you looking at?

Line 1a

Line 1a shows you the gross amount of your transactions.

Line 1b

Line 1b will show the gross amount of any card-not-present transactions. Card-not-present transactions could be transactions where you manually keyed the card number into your POS terminal, or if you accepted any online or phone sales.

Line 2

Line 2 is your merchant category code (MCC). An MCC is a four-digit code used by the payment card industry to classify your business based on the types of goods or services you sell.

You’ll be assigned an MCC by the International Organization for Standardization when you first start accepting credit cards. The code is used to determine things like interchange fees and cashback rewards.

There are a lot of different MCCs, but examples include

  • 5912 – used for drug stores and pharmacies;
  • 7011 – used for hotels, motels, and resorts; and
  • 5815 – used for retailers who sell digital goods (media, books, movies, and music).

If you’re receiving form 1099-K from a TPSO, Line 2 will probably be blank.

Line 3

Line 3 shows you the number of transactions you processed during the year.

Line 4

If any federal income tax was withheld from your payments, the amount will be on Line 4.

Likewise, if any state income tax was withheld, the amount will be on Line 8.

Line 5

Line 5 breaks down the gross amount of your transactions by month.

This is particularly helpful for you because you can use these amounts to make sure all your transactions are already included in your gross income. It’s a lot easier to find a missing transaction if you know to look in March, instead of having to search through the entire year.

The dollar amount for each of your transaction is determined on the date of the actual transaction. So, if someone spent $50 at your store on October 31, the amount will be included in your October total – even you didn’t receive the funds from your PSE until November.

What Do I Do with Tax Form 1099-K?

Your transactions and payments from form 1099-K are reported with the rest of your income. Depending on your business entity, you might report your income on

  • a Schedule C (this is the most common if you’re a sole proprietor, a freelancer, or an Uber driver),
  • an 1120s (if your company is an S Corp), or
  • a schedule E (if your company is a partnership, then the income will initially be reported on Form 1065).

When you receive form 1099-K, compare it to your financial statements to make sure the amount reported on the form is included in your gross income.

If you’re receiving the form because you accepted credit cards, compare your 1099-K to your credit card receipt records and merchant account statements to make sure everything matches.

If you’re receiving the form because you freelanced, drove for Uber or Lyft, or sold things on eBay, then compare your 1099-K to your bank statements to make sure everything matches.

Make sure to include the amounts of your transactions in your income before filing your tax return.