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If you do business online — selling products, for example — and you accept payment card transactions or payments from third-party networks, you may get a Form 1099-K in the mail before Jan. 31.
This form can help you properly account for your revenues so you avoid underpaying or overpaying your federal income tax obligation. Here are some things to know if you receive the form, including guidance on reporting your revenues correctly.
What is Form 1099-K?
Taking credit card payments or payments through third-party networks isn’t something that only big companies do.
If you’re a small business owner selling goods or services online, you can receive card payments and third-party network transactions just as someone who operates a storefront equipped with cash registers and card readers. And whatever the size of your business, you need to report all those transactions to the IRS. Form 1099-K can help you do that.
Form 1099-K is a form the IRS requires payment-settlement entities to use to report certain payments received through reportable payment card transactions and/or settlement of third-party payment network transactions. So if you received any of these kinds of payments during the tax year, you may receive Form 1099-K.
But with third-party networks, you’ll only get the form if you received more than $20,000 in gross payments and had more than 200 transactions.
If you’ve received payments from multiple payment processors during the year, you’ll receive one Form 1099-K from each processor who’s required to send one.
If you’re supposed to get the form, it should come directly from the payment card network or the third-party payment processor.
The form provides basic information for you and your business and the payment card or third-party payment network, including names, addresses, account numbers and taxpayer identification numbers.
The form also includes the gross amount you received from that source, along with a breakdown of the type of transactions and monthly volume. You can use this information to check your own accounting and report to the IRS on your tax return.
“[The form] will only show the payment volume processed and doesn’t deduct any fees you may have paid in use of this service,” says Riley Adams, a Louisiana-based CPA and owner of the blog Young and the Invested. “Those qualified expenses should be deducted separately as part of your business expenses.”
What’s the difference between Form 1099-K and Form 1099-MISC?
Depending on the nature of your business, you may get both forms, so it’s important to know what sets the two apart.
The primary difference is that Form 1099-K is designed for business owners who deal with transactions through payment card and third-party payment networks. On the other hand, you may receive a Form 1099-MISC if you were paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest, or more than $600 in …
- Services performed for a business where you’re not an employee
- Prizes and awards
- Other income payments
- Medical and healthcare payments
- Crop insurance proceeds
- Cash payments for fish or other aquatic life you purchase from anyone engaged in the trade or business of catching fish
- Cash paid from a notional principal contract to an individual, partnership or estate
- Payments as an attorney
- Fishing boat proceeds
In other words, the criteria for Form 1099-MISC are based on the type of payment while Form 1099-K focuses on the payment method. As a result, it is possible to receive both forms reporting the same payments.How to report 1099-Misc or 1099-K income
What to do with your Form 1099-K
You should receive your Form 1099-Ks by Jan. 31 of the year after the year in which you received the payments. For example, you should receive 1099-Ks by Jan. 31, 2020 for payments received during 2019. When you receive the form, it’s important to compare the information to your own records to make sure there aren’t any mistakes.
If you find any errors, contact the issuer of the form immediately to request a corrected version.
If there are no errors, use the form, along with your records, to report this income. This is especially important if you received revenues from other sources, like cash, checks and third-party network payments that didn’t meet the minimum requirements for the form.
Then report your gross receipts to the IRS on your tax return.
Filing your taxes when you’re self-employed can get complicated, especially if you receive unfamiliar forms. If you take card payments or payments through third-party networks, it’s a good idea to learn about Form 1099-K.
If you receive a 1099-K, take the time to make sure the information that’s been reported to the IRS is correct and that you don’t accidentally double up on income also reported on a 1099-MISC form.
“If you do not exceed the minimum threshold needed to receive a 1099-K form from your payment processor,” says Adams, “you should still make your best attempt to calculate this number on your own” and report the correct income amount to the IRS.
Credit Karma Tax®, a free online tax preparation and filing service, supports Form 1099-K, 1099-MISC and many other common tax forms — so you may be able to e-file your own taxes, even with 1099-K income.
A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA candidate with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.