Over the last decade, more businesses and individuals have turned to third-party payment-processing services to receive payments. For example, Stripe is on track to process over $1 trillion in payments for businesses in 2023. This trend has implications for where customers do business and how they make purchases, but it also affects tax season. The use of Form 1099-K has increased in recent years, and with recent changes from the IRS, more businesses than ever will need to file this form.

Form 1099-K ensures that small business owners, payment settlement entities (PSEs), and independent contractors report all of their income accurately to the IRS. As failure to comply with the reporting requirements can result in penalties and fines, every business that accepts payments through third-party providers needs to learn how to use this form.

Below is an overview of Form 1099-K, including what it is, what purpose it serves, who is required to file this form, what information is required on the form, and how to report it on your tax return. We will also discuss common errors that people make when filling in the form and how to correct information, if necessary. By understanding the importance of Form 1099-K and how to comply with the reporting requirements, businesses can avoid potential penalties and stay on top of their tax obligations.

What's in this article?

• What is Form 1099-K?
  
• Who receives Form 1099-K?
  
• Information required on Form 1099-K
  
• Threshold for Form 1099-K
  
• How to report Form 1099-K on your tax return
  
• How to correct information on Form 1099-K
  
• Penalties for non-compliance
  
• How Stripe can help
  

What is Form 1099-K?

Form 1099-K is an informational US tax form that PSEs submit to the IRS to report certain types of payments made by PSEs to businesses or sellers. These payments include online sales and other types of transactions. PSEs include companies such as Stripe and other payment-processing services that facilitate electronic transactions.

Form 1099-K includes the total amount of payments processed by the PSE on behalf of the seller. Sellers are responsible for reporting this income on their tax returns. Form 1099-K helps the IRS ensure that sellers report all their income, and it also helps PSEs comply with their reporting obligations.

Who receives Form 1099-K?

Form 1099-K is meant for individuals or businesses that receive payments through PSEs, such as Stripe and other payment-processing services. Through 2022, PSEs are required to send Form 1099-K to any payee who has received payments totalling more than $20,000 and processed more than 200 transactions during the calendar year. (These thresholds are changing in 2023 – more on that below.)

For example, if you run an online business and use Stripe to receive payments from customers, Stripe will send you a Form 1099-K if your transactions meet the reporting threshold. The form will report the gross amount of payments that you received through Stripe during the year.

Here are some examples of the types of businesses that typically receive Form 1099-K:

• Online retailers and e-commerce businesses that use payment-processing services such as Stripe to receive payments from customers
  
• Freelancers or independent contractors who receive payments through payment-processing services
  
• Gig workers who provide services through apps such as Uber or Lyft and receive payments through those platforms
  
• Marketplace sellers who sell goods on platforms like Amazon or Etsy and receive payments through those platforms
  
• Non-profit organisations that accept donations through payment-processing services
  
• Subscription-based services that charge recurring payments through payment-processing services
  

Information required on Form 1099-K

Here is the information that is typically required on Form 1099-K:

• Payer information
  This includes the name, address, and identification number of the PSE that is reporting the payments made to the payee. For example, if you use Stripe to accept payments, Stripe is the PSE.
  
• Payee information
  This includes the name, address, and taxpayer identification number (TIN) of the individual or business receiving the payments.
  
• Payment information
  This includes the gross amount of payments made to the payee through the PSE during the calendar year, broken down by month.
  
• PSE transaction information
  This includes the number of transactions processed by the PSE on behalf of the payee during the calendar year.
  

While it’s important to be thorough, accurate, and timely when filing your 1099-K, it’s a less complicated task if your third-party payment provider is meticulously tracking the required information about your payments, such as the number of transactions and total sales volume. At tax time, you’ll want a payments provider that provides this type of support.

Threshold for Form 1099-K

The American Rescue Plan of 2021 changed the reporting threshold for third-party PSEs, including payment apps and other online-settlement organisations. But in December 2022, the IRS announced that the changes to the Form 1099-K reporting threshold wouldn’t take effect until 2023. So up to and including the 2022 tax year, $20,000 is the federally mandated threshold of income through a third-party payment provider that triggers the need for payees to file a Form 1099-K. There are a few exceptions:

• District of Columbia, Maryland, Massachusetts, Mississippi, Vermont, and Virginia: The threshold is $600 in gross volume, in any given year
  
• Arkansas: The threshold is $2,500 in gross volume, in any given year
  
• Illinois: The threshold is four transactions and $1,000 in gross volume, in any given year
  
• New Jersey: The threshold is $1,000 in gross volume, in any given year
  

Starting in the 2023 tax year, businesses will be required to file a 1099-K form for any payee who receives $600 or more in aggregate payments during a calendar year. This is a very significant decrease from the previous federal threshold of $20,000, and it will impact businesses that accept payments through third-party payment networks.

Many more businesses will be required to submit Form 1099-K with the new $600 threshold. The new threshold will affect a wide range of businesses, including those that sell products or services online, accept donations, or provide freelance services. Businesses that are not aware of the new threshold could find themselves in violation of IRS regulations.

As the new threshold is a significant change for businesses that accept payments through third-party payment networks, businesses should be aware of the new threshold and take steps to comply with IRS regulations. Here are some tips for businesses that are affected by the new threshold:

• Keep track of all of your payments made through third-party payment networks.
  
• Review your tax return carefully to make sure that you have reported all of your income.
  
• Consult with a tax professional if you have any questions about the new threshold.
  

For Stripe Direct or Standard Connect users, you can learn more here about filing Form 1099-K for payments received through Stripe. For platforms that use Stripe and need to work on 1099 tax forms for connected user accounts, go here for more information. For more help understanding your 1099-K, visit “Understanding Your Form 1099-K” on the IRS website. You can also download a blank example of the 1099-K form here.

How to report Form 1099-K on your tax return

Here’s how to report Form 1099-K on your tax return:

• Review the information on your Form 1099-K: Check the name and TIN to make sure that they are correct. Also, verify the gross amount of payments reported on the form.

• Determine how to report the income, and include it on your tax return: The income reported on Form 1099-K is generally considered business income. If you are a business owner, you should report this income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). If you received the 1099-K as a result of a hobby, you should report the income on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, under "Other income".

The income reported on Form 1099-K may not be the same as the taxable income that you received. For example, if you are a business owner, you may be able to deduct expenses related to generating the income, such as shipping costs or materials. Make sure that you keep accurate records of your business expenses, so that you can deduct them on your tax return and reduce your taxable income where possible.

How to correct information on Form 1099-K

If you discover an error on your Form 1099-K, correct it as soon as possible. Here are some common errors that people make when filling out Form 1099-K:

• Incorrect name or TIN
  The name and TIN on the form must match the name and TIN that you provided to the PSE.

• Incorrect payment amounts
  The gross payment amount on Form 1099-K should reflect the total amount of payments you received through the PSE during the tax year.

• Duplicate reporting of payments
  If you receive more than one Form 1099-K from the same PSE, the PSE may have duplicated reporting of payments.

If you have errors on Form 1099-K, follow these steps to correct them:

• Contact the PSE that issued the form
  Notify the PSE of the error and request that they issue a corrected form with accurate information.

• Obtain a corrected form
  Once the PSE has corrected the information, they will issue a corrected Form 1099-K. Make sure that you keep a copy for your records and use the corrected form when filing your tax return.

• File an amended tax return, if necessary
  If you have already filed your tax return with the incorrect Form 1099-K, you may need to file an amended tax return to correct the information.

Carefully reviewing all forms for accuracy is a major part of managing taxes as a business. This can be time consuming, but it’s important for navigating tax season successfully. Working with the right partners to facilitate your payments can make this process easier. Correcting errors on these forms can help you avoid penalties and ensure that you report all of your income accurately.

Penalties for non-compliance

Because the IRS uses the information reported on Form 1099-K to ensure that taxpayers report all of their income accurately, failure to comply with the reporting requirements can result in penalties and fines. The IRS takes this form seriously, which means that businesses should, too. If PSEs fail to file Form 1099-K, or file an incorrect or incomplete form, they also may be subject to penalties.

The IRS might penalise you under these circumstances:

• If you fail to file in a timely manner
  
• If you fail to include all required information
  
• If you include incorrect information
  

A penalty could also apply if any of the following is true:

• If you file on paper when you were required to file electronically
  
• If you report an incorrect TIN
  
• If you fail to report a TIN
  
• If you fail to file paper forms that are machine readable and applicable revenue procedures provide for a machine-readable paper form
  

The fee for non-compliance is based on when you eventually file the correct form. The penalty structure is:

• If you correctly file within 30 days: $60 per return, with a maximum penalty of $630,500 per year ($220,500 for small businesses*)
  
• If you correctly file more than 30 days after the due date: $120 per return, with a maximum penalty of $1,891,500 per year ($630,500 for small businesses)
  
• If you file after 1 August, or don’t file at all: $310 per return, with a maximum penalty of $3,783,000 per year ($1,261,000 for small businesses)
  

*For this purpose, the IRS considers you a small business if your average annual gross receipts for the three most recent tax years (or however long your business has existed, if that’s less than three years) ending before the calendar year in which the information returns were due are $5 million or less.

Similarly, if a business fails to report income reported on Form 1099-K, the IRS might subject it to penalties for under-reporting income. The penalties for under-reporting income can be as much as 20% of the under-reported amount, plus interest.

How Stripe can help

Form 1099-K is an important tax form that small business owners, PSEs, and independent contractors in the US might need to file – but it’s not the only tax form to pay attention to. For business owners, freelancers, and independent contractors, tax season can be a complicated time – but with year-round planning and healthy accounting practices, it can be less stressful. This is where Stripe Tax comes in.

Stripe Tax automatically calculates and collects sales tax and generates tax reports for businesses. With Stripe Tax, businesses of any size can ensure that they are meeting their tax obligations and avoiding potential penalties.

Businesses have to collect taxes in over 130 countries and most US states. And with constantly changing tax rules and regulations, staying compliant can be complex – especially as businesses scale and expand into new markets. Stripe Tax simplifies tax compliance, helping businesses avoid penalties and fees while spending less time and resources.

Understanding the reporting requirements for Form 1099-K and using resources like Stripe Tax can help small business owners navigate the detail-oriented world of taxes and compliance. By staying informed and up to date on tax regulations, small business owners can focus on what they do best: running and growing their businesses.