We live in a time and place where things are accessible at the click of a button, including our money. It takes no time to send or receive cash on one of the many wire-transferring applications.
The accessibility makes it easier than ever to get your side hustle up and running, but the new tax law might begin to complicate things. The recent changes made by the IRS have significantly decreased the threshold for 1099-K reporting.
Previously you were able to collect up to $20,000 without triggering a 1099-K. The number has since lowered, and anyone that receives $600 or above will now receive this delightful form to complicate your tax situation just a little bit more. While it may cause a bit of confusion, there is no need to worry. I'm here to help!
What is a 1099-K?
Did you read 1099-K and immediately think of the 1099-NEC you received from OnlyFans? While you are on the right track, these forms are slightly different. As you know, you receive a 1099-NEC that reports all of the income earned from a specific employer/site as an independent contractor.
A 1099-K, on the other hand, reports income received by a payment card transaction or third-party resource. So what does that mean? The IRS defines this as the following:
A payment card is any card, including any stored-value card (having prepaid value, including gift cards), issued according to an agreement or arrangement that provides for all of the following.
• One or more issuers of the cards.
• A network of persons unrelated to each other, and to the issuer, who agree to accept the cards as payment.
• Standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept the cards as payment.
A third party payment network is any agreement or arrangement that provides for the following.
• The establishment of accounts with a central organization by a substantial number of providers of goods or services who are unrelated to the organization and who have agreed to settle transactions for the provision of the goods or services to purchasers according to the terms of the agreement or arrangement.
• Standards and mechanisms for settling the transactions. • Guarantee of payment to the persons providing goods or services (participating payees) in settlement of transactions with purchasers pursuant to the agreement or arrangement. A third party payment network does not include any agreement or arrangement that provides for the issuance of payment cards
( IRS website)
Simply put, this is any payment received through a credit card transaction, gift card, or wire transferring service.
Who Will Receive a 1099-K
Well, if you have received over $600 in transactions, get ready for your 1099-K to be a part of your 2021 tax preparation. Did your sugar daddy send you $1,000 through Venmo? Hello 1099-K! Receive over $600 in tips through Cash App? Yup, you're getting a 1099-K.
Receiving a payment that exceeds $600 in any of the following ways will earn you a 1099-K:
- Cash App
This is not an inclusive list, but my hope is that it gives you a better idea of whether or not you qualify to receive the form.
Have a Separate Business Account
Now, more than ever, it is so important to have a separate bank account as well as a separate account for your third-party resources. With both business and personal income filtering into the same place, it can make it very difficult to sort out your business expenses from your personal.
This will also help keep your personal transactions on these third-party networks under $600, so a 1099-K is only triggered for business expenses. That's right- even personal expenses can trigger a 1099-K. It doesn't matter if you are receiving money for lunch you just split, or a friend is paying you for an expense you previously fronted. If the total amount received throughout the year is $600 or more, it will still trigger a 1099-K.
Keeping a separate bank account for business income will keep your revenue transparent and help to eliminate any errors during tax time.
How to Read Form 1099-K
The majority of us have never heard of 1099-K until now, let alone seen what one looks like. Well, the time of being in the dark has come to an end. Below you can clearly see what the form looks like.
When receiving this form, it is important to make sure all of the information on it is correct and that it belongs to you. Even the IRS makes mistakes sometimes.
Before filing the 1099-K, make sure to check the following:
- Your personal information is correct, including your name, address, phone number, and social security number.
- The TIN (Taxpayer Identification Number) is correct. If you do not know your TIN, you can find this on previous tax returns.
- The gross amount of payment cards and third-party transactions are correct (box 1a).
- The number of payment transactions is correct (box 3).
- The Merchant Category Code is correct (box 2).
It is best practice to keep a backup of your receipts and payment record, so you can cross-check this information with the form and ensure that all of the information is accurate.
If you happen to notice a mistake on this form, you should contact the Payment Settlement Entity, also known as the PSE. Their contact details can be found on the bottom left of the form. They will walk you through the appropriate steps to make the corrections to your 1099-K.
The Bottom Line
If you receive $600 or more from any third-party wire-transferring application or payment card transaction, you will receive a 1099-K. This form contains a lot of important information, so it is crucial to verify that everything on the form is correct.
It's always best practice to consult with a tax professional if you are unsure of your tax situation or have additional questions. Are you looking for a new tax consultant? I would love to help. You can contact me at firstname.lastname@example.org.