The proliferation of services like PayPal and Venmo have made day-to-day life much easier for small businesses and individuals. Rather than having to collect cash or checks from customers, a business owner can simply send a link to pay an invoice by email. Or when you are splitting the check among a group of friends after an amazing brunch, it is no longer a problem when your share is $31.87 and all you have are two $20 bills – you can electronically transfer your $31.87 with just a few taps.
If you received more than $600 in these types of payments during 2022, you may receive a Form 1099-K from the payment network along with your W-2s and other tax documents that trickle in during January. The IRS has a lot of helpful advice on what to do with a 1099-K, and this is one of many articles out there on the subject.
UPDATE: The IRS recently announced that it is delaying implementation of the
updated 1099-K reporting requirement for one year. Essentially, the prior thresholds
($20,000 total or 200 transactions) remain in place. As a result, you will probably not
receive a 1099-K for your everyday PayPal or Venmo transactions this year.
The most common problem that individuals will have is receiving a 1099-K that is accurate—meaning you actually received the amount shown on the form—but shows amounts that are not taxable. To be clear, if you receive money for goods or services, that is taxable and you need to be sure to properly report that income! (We can help.) In the check-splitting example, though, that is not taxable income. Gifts are not taxable income, either. But you cannot just ignore a 1099-K if it shows nontaxable amounts, much like you cannot just ignore a W-2 from a job you hated. While the payment network is supposed to exclude nontaxable amounts from 1099-Ks, the reality is that will not always happen.
Trying to contact the payment network and get a reissued 1099-K might work, but that is going to take a lot of time and effort, and there is no guarantee that the payment network will fix the form. Your best bet is to simply report the amount received. That way, you will not run into any problems when the IRS computers compare all the forms. Then, enter an offsetting amount on your tax return as well so the net impact is zero. Be sure that the offset only includes nontaxable amounts. If you enter an offset improperly, you could be subject to severe penalties (in addition to the back taxes), if you do so intentionally. If you need advice on what is taxable versus nontaxable, contact us for a consultation.
Where should this happen? I will give you the typical lawyer answer to just about every question: it depends.
If you receive a 1099-K for splitting brunch or receiving gifts, your best offset choice is typically Form 1040, Schedule 1—Additional Income and Adjustments to Income. (This is an extra schedule that gets attached to your tax return to report various types of income; most folks will not need to use it.) Specifically, enter the amount received in Part I—Additional Income on line 8z, other income, along with a brief description such as “1099-K from Venmo.” Then, enter the amount received in Part II—Adjustments to Income on line 24z, other adjustments, along with a brief description such as “nontaxable amount on 1099-K.”
If you receive a 1099-K that contains your personal SSN rather than a business EIN, your best offset choice is probably Schedule C—Profit or Loss from Business. Be sure to enter the nature of the business on line A and the business name on line B like you would normally, but leave the EIN field blank. (Otherwise the IRS will get confused when your business files its separate partnership return on Form 1065 or s-corporation return on Form 1120S. If you report your business income on Schedule C anyway, there are no problems–just report the amount along with the rest of your business income like you would normally.) Enter the amount received in Part I—Income on line 1, gross receipts or sales. Then, enter the amount received in Part II—Expenses on line 10, commissions and fees.
Your tax preparation software should be able to handle this relatively easily, but if you would rather hire a pro than do it yourself, we are here for you! No matter what route you follow, receiving an unexpected 1099-K should not throw a wrench into your plans.
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