As the tax filing months are approaching, all the freelancers, self-employed, contractors, employers, and business owners are worried about various forms. Along with such forms, it is even more confusing to identify which Form 1099 will be received. There are 13 types of Form 1099 which serve various purposes.
In this article, we will focus on one of the most common types; that is, Form 1099-K. Let’s first understand what it is.
What is a Form 1099 K?
Understanding in simpler terms, Form 1099-K is an information return that records details or reports the transactions to the IRS. However, the transactions have to be of a particular kind only.
It helps in improving voluntary tax compliance in the US. It must be received by the recipient by January 31 of the year following the last tax or calendar year.
Why is it used for?
The Form 1099-K reports certain transactions that too with specified conditions. The payments such as:
- Card payments including debit cards, credit cards and stored value cards
- Payments made via third-party network processors like PayPal, Stripe, etc.
Two copies of Form 1099-K need to be issued out of which one goes to the recipient and the other goes to the IRS. This helps the IRS to ensure that the transactions are properly reported by the online retailers or sellers in the tax filing form.
The limit for third-party transaction payments has been updated by the American Rescue Plan 2021. The threshold limit for the gross payments against the goods and services is $600 now, without any limit of transactions. This means no matter if you have made one transaction or 1000, if the amount is more than $600 even by a $0.01,
Remember that this form only reports the transactions made in a digital business and not other online payments. Make sure that the transactions in the Form 1099-K have been reflected in your Schedule-C form as well. Any mismatch in the two can cause further complexities with the IRS.
Who receives the Form 1099-K and who issues it?
As mentioned earlier, Form 1099 K is mandatory to report the transactions made via digital business. It means that all online retailers must receive this form. The only condition is that they need to surpass the threshold limit in case of third-party network transactions or receive payments via payment cards.
Most people also consider that these digital business owners are also sole proprietors and are not like C-Corp or S-Corp businesses in the USA. So, whether they have a separate business entity or not, they will receive a Form 1099-K, in case of online payments made against your sales of goods or services.
As a freelancer, self-employed, or eCommerce business owner, you don’t have to file Form 1099-K yourself. The third party payment processors or the PSEs who make the online payments for your services or online payments are the ones who issue the Form and send a copy to you by January 31.
However, it is suggested to maintain a proper record of all the transactions made so that you can reconcile them with the form. In case of any issues or errors, you need to contact the PSE or third-party network entity to make the correction.
Which payments get deducted from Form 1099-K?
While understanding the payments and transactions that must be reported, one must also know about the deductions valid in the Form 1099-K. In order for a correct Tax Filing, the recipients can avail deductions on some of the credit card made payments. These payments include:
- Business advertising costs
- Fees paid for web hosting
- Internet or Wi-Fi connection fees used for business purpose
- Fees paid for making payments via credit card as well as merchant fees
- Part of home which is used for office purpose
In case you are paying any such fee, you are liable to deduct that amount.
If your business requirements and nature of transactions differ from this, you might receive another type of Form 1099. However, if this is the one, then you must check some important points about Form 1099 K.
Written by – Priyanka Rampal
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