The new form is called 1099-K. It is used to report payments to you from payment apps like Venmo or PayPal.
By Steve Hoffman, The Tax Translator
My hair stylist business now has a new way to tip their employees. They provided a QR Code for each stylist that went directly to their Venmo account. I began to tell her that the tips she receives from her Venmo account, if over 600.00 in a calendar year are now reportable to the IRS on Form 1099-K. She will receive a copy of the form by January 31 of the next year (so, by Jan 31, 2024 she will receive this form). I advised her to not throw this away as the IRS also receives a copy. The Form will report to her and the IRS, the amount of money transferred to her during 2023 if the amount is over 600.00.
I also let her know that there has been no federal or state income tax withholding on her tip income and this could impact her filing her individual income tax return for the year. So, if she normally received a refund, and counted on that refund, she may be surprised that she has to pay tax on the amount reported on this Form.
The IRS believes there are billions of dollars in unreported income and Congress acted by passing the American Rescue Act of 2021.
This new form and reporting of the money received applies to all payment processors, to include PayPal, Stripe, Square, Zelle and all the other third-party payment networks that exist.
Reporting is required for payments for a personal item you sold or for goods you sell, services you provide or property you rent through some of the list below (not inclusive)
- There are many online consignment sites for the sale or resale of clothing, furniture and other items.
- Do you sell items on Etsy
- Do you sell items at auction on a site like EBay
- Do you rent a place to stay on VRBO or AirBnB
- Do you sell unused sporting or event tickets, for example on Craigslist
- Are you providing services on Fivver – contract services for making an item
Let’s say you sold a piece of furniture, maybe your sofa and you were paid through one of these apps. Maybe you sold your sofa at a loss or maybe you made money on the sale – sold for more than you paid for the sofa.
The tax treatment is different for each of these situations. Even though it’s a personal item, the sofa, if sold at a gain (you bought it for 500. and sold for 1100.), you’re going to have taxable income of 600. to report on your tax return and you will receive a 1099-K.
But more likely, you sold at a loss– that is you paid more for it than you sold it for. For example, you paid 1100. For the sofa but sold it for 700. You’re still going to receive a 1099-K for the 700. you received from Venmo or one of the other apps. Unfortunately, the loss from a sale of a personal item isn’t deductible. But you still have this form saying you received money for the sale. What to do about this?
There will be some new lines on the Schedule 1 of Form 1040 for you to complete when you file your taxes. There will be lines on your 1040 for 2023 that ask for the amounts from the 1099-K but there will also be lines that are for adjustments to the amount on the 1099-K. So, you’re entering or reporting the income but adjusting to reflect a personal item sold at a loss.
These 2 entries result in a $0 net effect on your adjusted gross income and thus no tax will be due on this 700.00 you had reported to the IRS from the 1099-K.
If You Sell Goods, Rent Property or Provide Services
You may get a Form 1099-K if you received payments through payment cards, payment apps or online marketplaces.
These transactions can include payments you received as a gig worker, freelancer or other independent contractor (self-employed). This may also include payments you received from selling items as a hobby.
You must report all income you receive on your tax return.
What happens if you don’t report 1099-K?
If you forget to report the income documented on a 1099-K form, the IRS will catch this error. Remember, the IRS also gets a copy of the 1099-K. When the IRS thinks that you owe additional tax on your unreported 1099-K income, it’ll usually notify you and retroactively charge you penalties and interest for the additional tax owed.
What do I do if the 1099-K is wrong?
You may get a Form 1099-K in error when the form:
- Reports payments that were gifts or reimbursements from family or friends
- Doesn’t belong to you or is a duplicate
If this happens:
- Contact the issuer immediately – see who sent it to you on the top left corner of Form 1099-K
- Request a corrected form from them. Write them, call them, email them, but keep a copy of the original form and all correspondence with the company that sent you the 1099-K from for your records.
What if you try contacting the issuer of the 1099-K but get no response?
I feel this is more than likely to happen. We’ve all called, been placed on hold and then disconnected!!
You can fix this by using the line on your 1040 that says “Form 1099-K received in error”. You have to do this in two places on your 1040. These 2 entries note the error and result in a $0 net effect on your adjusted gross income (AGI).
Many of the payment processing apps now have an option to indicate if the amount you received is personal or related to your business. Be sure to choose the correct one, and let your friends know which one to pick too.
So, buying concert tickets for a friend and they pay you back through Venmo? (Swifties be alert to this). Or you’re selling your old guitar you haven’t played in years but don’t remember what you paid for it ten years ago? Paying the entire restaurant bill for you and all your friends but they each pay you back through PayPal? These are other examples of why you might also receive a 1099-K next January.
If you’d like to see a draft copy of the 1099-K you can see it on the IRS website at this link:
https://www.irs.gov/pub/irs-pdf/f1099k.pdf
You’ll notice it has several boxes on the form that will show you the total amount you received and the number of transactions you had with the payment processor. It even requests the amounts be shown by month during the year.
If in doubt, ask your paid tax return preparer to look carefully at your situation. I haven’t seen the popular tax software, TurboTax for instance, but I’m sure they will be adding a lot of questions for you to properly complete and file your tax return for 2023.
Here’s a video from the IRS about the 1099-K
https://www.youtube.com/watch?v=C1ueDRXJ7vY
My hair stylist business located in Lowell is now has a new way to tip their employees. They provided a QR Code for each stylist that went directly to their Venmo account. I began to tell her that the tips she receives from her Venmo account, if over 600.00 in a calendar year are now reportable to the IRS on Form 1099-K. She will receive a copy of the form by January 31 of the next year (so, by Jan 31, 2024 she will receive this form). I advised her to not throw this away as the IRS also receives a copy. The Form will report to her and the IRS, the amount of money transferred to her during 2023 if the amount is over 600.00.
I also let her know that there has been no federal or state income tax withholding on her tip income and this could impact her filing her individual income tax return for the year. So, if she normally received a refund, and counted on that refund, she may be surprised that she has to pay tax on the amount reported on this Form.
The IRS believes there are billions of dollars in unreported income and Congress acted by passing the American Rescue Act of 2021.
This new form and reporting of the money received applies to all payment processors, to include PayPal, Stripe, Square, Zelle and all the other third-party payment networks that exist.
Reporting is required for payments for a personal item you sold or for goods you sell, services you provide or property you rent through some of the list below (not inclusive)
- There are many online consignment sites for the sale or resale of clothing, furniture and other items.
- Do you sell items on Etsy
- Do you sell items at auction on a site like EBay
- Do you rent a place to stay on VRBO or AirBnB
- Do you sell unused sporting or event tickets, for example on Craigslist
- Are you providing services on Fivver – contract services for making an item
Let’s say you sold a piece of furniture, maybe your sofa and you were paid through one of these apps. Maybe you sold your sofa at a loss or maybe you made money on the sale – sold for more than you paid for the sofa.
The tax treatment is different for each of these situations. Even though it’s a personal item, the sofa, if sold at a gain (you bought it for 500. and sold for 1100.), you’re going to have taxable income of 600. to report on your tax return and you will receive a 1099-K.
But more likely, you sold at a loss– that is you paid more for it than you sold it for. For example, you paid 1100. For the sofa but sold it for 700. You’re still going to receive a 1099-K for the 700. you received from Venmo or one of the other apps. Unfortunately, the loss from a sale of a personal item isn’t deductible. But you still have this form saying you received money for the sale. What to do about this?
There will be some new lines on the Schedule 1 of Form 1040 for you to complete when you file your taxes. There will be lines on your 1040 for 2023 that ask for the amounts from the 1099-K but there will also be lines that are for adjustments to the amount on the 1099-K. So, you’re entering or reporting the income but adjusting to reflect a personal item sold at a loss.
These 2 entries result in a $0 net effect on your adjusted gross income and thus no tax will be due on this 700.00 you had reported to the IRS from the 1099-K.
If You Sell Goods, Rent Property or Provide Services
You may get a Form 1099-K if you received payments through payment cards, payment apps or online marketplaces.
These transactions can include payments you received as a gig worker, freelancer or other independent contractor (self-employed). This may also include payments you received from selling items as a hobby.
You must report all income you receive on your tax return.
What happens if you don’t report 1099-K?
If you forget to report the income documented on a 1099-K form, the IRS will catch this error. Remember, the IRS also gets a copy of the 1099-K. When the IRS thinks that you owe additional tax on your unreported 1099-K income, it’ll usually notify you and retroactively charge you penalties and interest for the additional tax owed.
What do I do if the 1099-K is wrong?
You may get a Form 1099-K in error when the form:
- Reports payments that were gifts or reimbursements from family or friends
- Doesn’t belong to you or is a duplicate
If this happens:
- Contact the issuer immediately – see who sent it to you on the top left corner of Form 1099-K
- Request a corrected form from them. Write them, call them, email them, but keep a copy of the original form and all correspondence with the company that sent you the 1099-K from for your records.
What if you try contacting the issuer of the 1099-K but get no response?
I feel this is more than likely to happen. We’ve all called, been placed on hold and then disconnected!!
You can fix this by using the line on your 1040 that says “Form 1099-K received in error”. You have to do this in two places on your 1040. These 2 entries note the error and result in a $0 net effect on your adjusted gross income (AGI).
Many of the payment processing apps now have an option to indicate if the amount you received is personal or related to your business. Be sure to choose the correct one, and let your friends know which one to pick too.
So, buying concert tickets for a friend and they pay you back through Venmo? (Swifties be alert to this). Or you’re selling your old guitar you haven’t played in years but don’t remember what you paid for it ten years ago? Paying the entire restaurant bill for you and all your friends but they each pay you back through PayPal? These are other examples of why you might also receive a 1099-K next January.
If you’d like to see a draft copy of the 1099-K you can see it on the IRS website at this link:
https://www.irs.gov/pub/irs-pdf/f1099k.pdf
You’ll notice it has several boxes on the form that will show you the total amount you received and the number of transactions you had with the payment processor. It even requests the amounts be shown by month during the year.
If in doubt, ask your paid tax return preparer to look carefully at your situation. I haven’t seen the popular tax software, TurboTax for instance, but I’m sure they will be adding a lot of questions for you to properly complete and file your tax return for 2023.
Here’s a video from the IRS about the 1099-K
