I mentioned in an earlier Blog that many taxpayers will be receiving a new form in the mail for the first time this year. Form 1099-K is a report of payments you received for goods or services during the year from:
- Credit, debit, or stored value cards such as gift cards (payment cards)
- Payment apps or online marketplaces, also called third-party settlement organizations or TPSOs. One example is PayPal. Many of my clients use PayPal (they are also my credit card processing company).
- Zelle states online that they do not issue 1099-K forms because they are exempt from the reporting requirement. That’s because Zelle doesn’t hold your funds in an account, like PayPal, Venmo or Cash App do, and instead is used as a way to transfer money between bank accounts.
- Venmo’s 1099-K tax reporting requirements only pertain to payments received for sales of goods and services and DO NOT apply to friends and family payments.
- Cash App will not report personal payments (such as bill splitting of gifts).
If the total payments made by these organizations exceed $5,000, they are required to fill out Form 1099K and send copies to the IRS and you. In the past, the minimum requirement for issuing this form was when the total payments exceeded $20,000. As a result of this newly lowered minimum filing requirement, millions of taxpayers will be seeing this form in their mailbox for the first time—most likely in late January or early February 2025.
Why the limit was lowered
Congress and the IRS were concerned about the millions of taxpayers who pursued side jobs and failed to report income earned. Under the Internal Revenue Code, all forms of income are to be reported unless expressly deemed nontaxable under the Code. For example, gifts and inheritances are generally tax-free to the recipient. Social Security benefits are tax-free unless the recipient has other income, and that can cause part of the benefit to be taxable (up to a maximum of 85%).
Income from any business or hobby is taxable regardless of the amount received. That is believed to be the primary source of the unreported income on millions of returns. The reduction in the filing requirement for the 1099-K is intended to force (or strongly encourage) taxpayers to report income from such activities. The failure to report the income can lead to an audit, the imposition of civil penalties and interest – and, in the most egregious circumstances, criminal prosecution and prison time. Failing to report all your income is a crime, so taxpayers must be careful that their returns are accurate and report all their income.
Who gets Form 1099-K
You should get Form 1099-K for these situations:
If you take direct payment by credit or bank card for selling goods or providing services
If your customers or clients pay you directly by credit, debit, or gift card, you will get a Form 1099-K from your payment processor or payment settlement entity, no matter how many payments you got or how much they were for.
If you used a payment app or online marketplace and received a Form 1099-K
A payment app or online marketplace is required to send you a Form 1099-K if the payments you received for goods or services total over $5,000. However, they can send you a Form 1099-K with lower amounts. Whether or not you receive a Form 1099-K, you must still report any income on your tax return.
This includes payments for any:
- Goods you sell, including personal items such as clothing or furniture
- Services you provide
- Property you rent
The payments can be made through any:
- Payment app
- Online community marketplace
- Craft or maker marketplace
- Auction site
- Car-sharing or ride-hailing platform
- Ticket exchange or resale site
- Crowdfunding platform
- Freelance marketplace
If you accept payments on different platforms, you could get more than one Form 1099-K.
Reporting threshold
IRS Notice 2024-85, issued 11/26/2024, provides guidance and clarifies that third-party settlement organizations are required to report transactions for goods or services where the total payments received were more than $5,000 in 2024, more than $2,500 in 2025 and more than $600 in calendar year 2026 and thereafter.
There are no changes to what counts as income or how tax is calculated.
The reporting threshold for third-party settlement organizations, which include payment apps and online marketplaces, was changed to $600 by the American Rescue Plan Act of 2021.
Although the IRS is taking a phased approach to implementing the Form 1099-K reporting threshold, companies could still send the form for totals over $600.
No matter the amount, you must report your income if you receive payments for selling goods or services or renting property.
Personal payments from family and friends
The money you received from friends and family as a gift or repayment for a personal expense should not be reported on Form 1099-K. These payments are not taxable.
For example, they can share the cost of a car ride or meal, receive money for birthday or holiday gifts, or get repaid by a roommate for rent or a household bill.
Be sure to note these types of payments as non-business in the payment apps when possible.
If your Form 1099-K has incorrect information
If the Payee Taxpayer Identification Number (TIN) or gross payment amount is incorrect:
Request a corrected form from the issuer
- Request a corrected form from the issuer – see “Filer” on the top left corner of Form 1099-K to find the name and contact information of the issuer. If you do not recognize the issuer, contact the Payment Settlement Entity (PSE) identified on the bottom left corner of the form above your account number.
- Keep a copy of the corrected Form 1099-K with your records and any correspondence with the issuer or PSE.
Do not contact the IRS. They cannot correct your Form 1099-K.
File your taxes even if you can’t get a corrected form
Do not wait to file your taxes. To file your tax return, take these steps:
If the payee Taxpayer Identification Number (TIN) is incorrect
Report payments from Form 1099-K and any sources of income on the appropriate tax return you normally file.
If the gross payment amount is incorrect
For non-business payments received, report the amount from your incorrect Form 1099-K on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, then note the error as shown in the example below.
Example: You receive Form 1099-K that includes $20,500 your family sent you for college tuition and books.
On Schedule 1 (Form 1040):
- Enter the error on Part I – Line 8z – Other income: “Form 1099-K received in error, $20,500”
- Adjust it on Part II – Line 24z – Other adjustments: “Form 1099-K received in error, $20,500”
These two entries note the error, resulting in a $0 net effect on your adjusted gross income (AGI).
NOTE: If you attempt to correct the error by entering the correct amount on Schedule 1 instead of the amount shown on the 1099-K, the IRS computer system may flag your return when it does a document match of your income reported on the return compared with the source documents received by payors.
Personal item sold at a loss
Similarly, if a taxpayer receives a Form 1099-K for a personal item sold at a loss, report the information on Schedule 1 with offsetting transactions.
For example, a taxpayer who received a Form 1099-K for selling a couch online for $700 would report on Form 1040:
- Part I – Line 8z – Other Income – Form 1099-K Personal Item Sold at a Loss $700.
- Part II – Line 24z – Other Adjustments – Form 1099-K Personal Item Sold at a Loss $700.
The net effect of these two adjustments on adjusted gross income would be $0.
Incorrect 1099-K received by your business
This could impact me. I allow clients to pay my invoices by Zelle, PayPal and other cash apps. However, I also use Zelle to pay and receive non-taxable payments to and from my family. My concern is that the 1099-K may erroneously include the non-taxable payments in the 1099-K. I also attach a schedule to my return of all information documents received for my business as I am fully aware of the document match process. So, where will I adjust my gross income to account for an excessive amount listed on one or more of the 1099-K forms?
I looked online for any solution recommended by the IRS and found nothing. So, absent their guidance, I will take this approach and recommend it to my clients.
For line 1 of Schedule C (Gross Income or Sales), in a supporting statement, list the income as shown on each 1099-K or 1099-NEC (non-employee compensation) or 1099-MISC (miscellaneous income), plus the income for which you did not receive a 1099 form. That way, the IRS can match each 1099 form received with the information in their system.
Next, on line 2, enter the necessary adjustment for the inaccurate 1099 forms as a negative amount. I will include a supporting statement listing the specific erroneous 1099-K forms with a note ADJUST 1099-K to CORRECT AMOUNT and the appropriate negative amount. By making the negative adjustment on line 2, line 3 (Subtotal) will reflect the correct gross receipts received for the tax year.
I considered using line 6 (Other Income) to make the negative adjustment. However, the IRS system expects that line to be a positive number. Therefore, my concern is that the return could be flagged for a potential audit due to the unexpected negative number.
Multiple Sources of Business Income
You might report multiple sources of income on more than one line of a return or multiple returns or schedules.
For example, you may operate a retail business as a sole proprietor and have rental income. You may accept payment cards for both businesses. If you process the payments on one terminal, your Form 1099-K would include gross payment amounts for both businesses.
What to do:
- Use your books and records to report all gross receipts on the appropriate line or schedule.
- In this example, you report gross receipts from the retail business on Schedule C and amounts for rental activity in the rental income on Schedule E.
I also recommend including a statement in the return listing the full amount of the K-1 and showing how the total income was allocated.
Summary
This will be an interesting tax season dealing with these forms and the expected errors that will occur. This analysis will take time, and taxpayers who receive these forms for 2024 should expect that the cost of preparing their returns will likely be higher for 2024 than in past years.