What Business Owners Should Know About IRS 1099-K

What Business Owners Should Know About IRS 1099-K

Business owners who accept payments through apps such as PayPal, Cash App and Venmo need to be prepared not only for a rush of 1099-K forms from the IRS, but also for taking it upon themselves to have any inaccurate forms corrected.

 That’s because a business could receive a Form 1099-K when the reported income doesn’t actually belong to your business at all. If you don’t get it fixed, the IRS will find a mismatch between the income reported on your tax return and the amount reported on the 1099-K form.

That might seem like no big deal. The income wasn’t yours in the first place, so you didn’t bother to report it. And that’s the end of that, right?

Unfortunately, it’s not that simple. The domino effect of that one incorrect form could spell major tax trouble and leave you with a big tax bill — for money you didn’t even make — plus penalties on top of it.

There are no two ways around it. You cannot ignore an incorrect 1099-K. And you’re going to have more chances of receiving an inaccurate one, due a big change in when payment processing apps are required to send them out.

Much Lower Thresholds for 1099-K Forms From Payment Processing Apps

Much Lower Thresholds for 1099-K Forms From Payment Processing Apps

Form 1099-K is a federal tax form used to report gross payments received by both businesses and individuals through third-party payment processing apps. It helps the IRS track and ensure accurate reporting of income from these transactions.

For any transactions during 2023, businesses should expect to receive a Form 1099-K from each third-party payment app through which they have received a total amount of $600 or more.

In past years, Venmo, PayPal, Cash App and other similar apps didn’t have to send out a 1099-K unless a business had more than $20,000 worth of transactions for goods and services and more than 200 business transactions in one year.

Clearly, a gross payment of $600 or more through any app is a lot lower than $20,000 with more than 200 transactions, so it makes sense that there will be a whole lot more of these forms. And they will be sent to both businesses and individual taxpayers, creating a lot of confusion.

Inevitably, more IRS forms will likely lead to more audit letters due to underreported income, known as IRS Letter CP2000 letters.

If you have received an audit letter from the IRS and don’t know what to do, book a consultation with an IRS tax lawyer who has significant experience handling audits.

What Sorts of Businesses Will Receive a Form 1099-K — or Several of Them?

What Sorts of Businesses Will Receive a Form 1099-K — or Several of Them?

Any business that sells goods, provides services, or rents property should receive a 1099-K for the 2023 tax year from any payment processing app through which that business received $600 or more.

That covers business owners, self-employed individuals, and gig workers, including anyone who drives for Uber or Lyft, food delivery drivers, and other independent contractors.

It also covers partnerships and corporations that sell goods and services, and any business that receives rental income.

Be aware that the amount of income on Form 1099-K will match the original transaction amount. There will be no adjustments for discounts, fees, credits or any refunds that followed.

If Your Business Received a 1099-K for Income That’s Not Yours, Here’s What You Need to Do

Here are some examples of circumstances when you might receive a Form 1099-K in error and how to fix it. For any corrections made, be sure to keep a paper trail so you can prove you acted to solve it, in an audit arises.

  • The form lists your name instead of your business name. You could receive a 1099-K that notes your name and Social Security number, but you report your business income under your EIN number on Form 1120, 1120-S or 1065. To fix the problem, contact the processor that sent the form and request a corrected one that lists your business EIN number, and include the payment on the correct business tax return.
  • You change your business entity. If you change your business entity, such as from an LLC to a partnership, but keep using the same PayPal account to accept payment, your 1099-K amount won’t match up with the tax return for the partnership. If that happens to you, inform the relevant payment processing app about the change and keep all records related to your income and deductions for both entities.
  • You share your Venmo account with another business. If you share your Venmo account with another business, you will receive a 1099-K that includes your income, as well as payments attributable to the other business. The big lesson here is not to share these accounts going forward. You must have your own payment processing app account for your business and only your business. To solve the immediate issue, file a 1099-MISC for the other business that lists the amount you paid to that business through your Venmo account.
  • You have more than one source of business income with separate tax returns but accepted the payments for both through the same PayPal account. For example, if you receive rental income on your condo and you are a self-employed consultant, your 1099-K will include payments for both businesses. In a situation like that, report your gross income for each business on the right tax form. For your consulting business, report the income on Schedule C, and report the rental income on Schedule E.

The confusion with 1099-Ks is real and growing as more forms are sent out. If you have an IRS tax problem involving Form 1099-K, speak with an experienced tax attorney now.

The-Law-Firm-of-Alyssa-Whatley

Alyssa Maloof Whaltey

My goal is to make the tax resolution process as easy and stress free as possible so you can get back to focusing on the things that bring you joy.

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