Form 1099-K: Merchant Card and Third Party Network Payments (2018)
Understanding your tax forms doesn't have to be complicated. Form 1099-K is an important document that reports payment transactions, and knowing how it works can help you file your taxes accurately and avoid potential issues with the IRS. This guide breaks down everything you need to know about the 2018 Form 1099-K in plain English.
What Form 1099-K Is For
Form 1099-K is an information return used to report payment card transactions and third-party network payments made to businesses and individuals. Think of it as a receipt that payment processors send to both you and the IRS to document the money you received through electronic payment systems during the calendar year.
Payment Settlement Entities (PSEs)—which include credit card companies like Visa and Mastercard, payment apps such as PayPal and Venmo, and online marketplaces like eBay or Etsy—must file this form. The form reports the gross amount of transactions, meaning the total dollar amount before any deductions for fees, refunds, chargebacks, or other adjustments. This is a critical distinction because the amount on your Form 1099-K may be higher than your actual taxable income.
There are two types of transactions reported on Form 1099-K. Payment card transactions include purchases made with credit cards, debit cards, or stored-value cards (like gift cards). Third-party network transactions occur when you accept payments through platforms that connect buyers and sellers, such as payment apps or online marketplaces that facilitate transactions between unrelated parties.
The form serves multiple purposes: it helps the IRS verify that taxpayers report all their income, it provides you with a record of your business transactions, and it ensures payment processors are transparent about the money flowing through their systems. You'll receive Copy B of the form for your records, while the IRS receives Copy A IRS.gov.
When You’d Use Form 1099-K (Late/Amended Filing)
Most taxpayers receive Form 1099-K rather than file it—the payment processor handles the filing. However, understanding the filing timeline is important if you're expecting to receive one or if you're a business that processes payments for others.
Filing Timeline and Due Dates
Payment settlement entities must file Form 1099-K with the IRS and provide a copy to the payee by January 31st following the calendar year in which the payments were made. For 2018 transactions, forms were due by January 31, 2019. If you didn't receive your form by mid-February, you should contact the payment processor listed on previous statements.
Correcting Errors (Amended/Corrected Forms)
If you receive a Form 1099-K with incorrect information—such as wrong payment amounts, duplicate reporting, or transactions that weren't actually yours—you should immediately contact the issuer (the payment company whose name and phone number appear in the upper left corner of the form). Request a corrected form, which the issuer must file with "CORRECTED" marked in the appropriate box. Keep all correspondence with the issuer in your records.
Filing Your Return When a Correction Is Pending
If you can't obtain a corrected form before the tax filing deadline, you should still file your tax return on time. Report your actual correct income on your return and use Schedule 1 (Form 1040), Additional Income and Adjustments to Income, to reconcile any discrepancies. You can include an explanation statement showing why the Form 1099-K amount differs from what you're reporting as taxable income.
Statute of Limitations for Corrections
The statute of limitations for correcting a Form 1099-K is generally three years from the original filing date. If you discover you need to amend your personal tax return because of Form 1099-K issues, file Form 1040-X (Amended U.S. Individual Income Tax Return) within this timeframe to claim any refund you're entitled to receive IRS.gov.
Key Rules or Details for 2018
For the 2018 tax year, specific reporting thresholds determined whether payment processors were required to issue Form 1099-K. Understanding these rules helps you anticipate whether you'll receive a form.
Payment Card Transactions (Credit/Debit)
For payment card transactions (credit and debit cards), there was no minimum threshold. If you accepted even a single payment card transaction, the payment processor was technically required to report it, although in practice, most consolidated annual statements.
Third-Party Network Transactions (Apps/Marketplaces)
For third-party network transactions (payment apps and online marketplaces), more restrictive thresholds applied. A third-party settlement organization only had to file Form 1099-K if both of these conditions were met:
- Gross payments exceeded $20,000 for the calendar year, AND
- There were more than 200 separate transactions
These thresholds applied per payment processor and per taxpayer identification number (TIN). If you used multiple platforms or had transactions split across different business entities, each would be evaluated separately against these thresholds.
Gross Amounts vs. Taxable Income
The form reports gross amounts without adjustments. This means the total includes all payments received, regardless of whether you later issued refunds, paid processing fees, or had chargebacks. If you received $25,000 in payments but refunded $5,000 to customers and paid $1,000 in fees, the Form 1099-K would still show the full $25,000.
Card-Present vs. Card-Not-Present
Form 1099-K distinguishes between "card present" and "card not present" transactions. Card not present transactions—such as online sales, phone orders, or mail-order purchases—are reported separately in Box 1b because they carry different risk profiles and may be subject to different processing fees.
Foreign Payments
Foreign payments have special rules. If you have only a foreign address and no U.S. connections, payment processors may not be required to file Form 1099-K for your transactions, depending on various factors outlined in the IRS instructions. However, this doesn't exempt you from reporting income on your U.S. tax return if you're a U.S. person IRS.gov.
Step-by-Step (High Level)
When you receive Form 1099-K, follow these steps to properly report it on your tax return:
Step 1: Verify the Information
Carefully review all boxes on the form. Check that your name, address, and taxpayer identification number (Social Security Number or Employer Identification Number) are correct. Verify that the gross amount in Box 1a matches your records. Review the monthly breakdowns in Boxes 5a through 5l to identify any discrepancies.
Step 2: Reconcile with Your Records
Compare the Form 1099-K amount with your actual business records. Remember that the form shows gross receipts, but your taxable income will be different. Subtract legitimate business expenses, refunds you issued to customers, processing fees charged by the payment processor, chargebacks, and any personal transactions incorrectly included (such as reimbursements or payments from friends and family that shouldn't be reported as business income).
Step 3: Determine Your Actual Taxable Income
Calculate your net business income by starting with total payments received (which may exceed the Form 1099-K amount if you also received cash or checks), then subtracting all ordinary and necessary business expenses. This net figure is what you'll report on your tax return.
Step 4: Report on the Appropriate Tax Form
The reporting location depends on your business structure. Sole proprietors report on Schedule C (Profit or Loss from Business). Single-member LLCs typically also use Schedule C. Partnerships file Form 1065 and issue Schedule K-1 to partners. Corporations file Form 1120 or 1120-S. Even if the Form 1099-K amount isn't fully taxable, you must report the income and explain any differences.
Step 5: Keep Thorough Documentation
Retain your Form 1099-K along with all supporting records—bank statements, payment processor reports, receipts for business expenses, refund documentation, and any correspondence about the form—for at least three years (the standard IRS audit period), though keeping them longer is advisable for certain situations IRS.gov.
Common Mistakes and How to Avoid Them
Even experienced taxpayers make errors when dealing with Form 1099-K. Here's what to watch out for:
Mistake #1: Reporting the Gross Amount as Taxable Income
Many taxpayers see the large number in Box 1a and mistakenly report that entire amount as profit. Remember, this is gross receipts, not profit. You're entitled to deduct all legitimate business expenses. Keep detailed records of costs of goods sold, operating expenses, processing fees, and refunds issued. The IRS expects you to report your actual net income, not the inflated gross figure from the form.
Mistake #2: Ignoring the Form Entirely
Some people assume that if income came through a payment app for personal transactions, it's not reportable. This is dangerous. The IRS receives a copy of every Form 1099-K issued. If you don't report it at all, their systems will flag the discrepancy, likely triggering correspondence or an audit. Even if transactions were non-taxable (like reimbursements), you need to report them and explain why they're not taxable income.
Mistake #3: TIN Mismatches
If the name and taxpayer identification number on your Form 1099-K don't match IRS records exactly, you may face backup withholding (currently 24% of future payments) until the issue is resolved. Ensure your payment processor has your correct legal name and TIN on file. If you operate under a business name (DBA), confirm whether you should use your SSN or your business EIN.
Mistake #4: Combining Business and Personal Transactions
Using the same payment app or account for both business income and personal transfers creates reporting headaches. The Form 1099-K will include everything, forcing you to sort out what's taxable. Consider maintaining separate accounts. If you used a payment app like Venmo or PayPal for both business sales and splitting dinner bills with friends, you'll need to carefully document which transactions were business-related.
Mistake #5: Not Reconciling Multiple Forms
If you used several different payment processors, you'll receive multiple Forms 1099-K. Each reports separately, but you must combine them for your total gross receipts on your tax return. Failing to include all forms can make your income appear inconsistent. Create a master spreadsheet that consolidates all payment sources.
Mistake #6: Missing the Merchant Category Code Implications
Box 2 contains a four-digit merchant category code that classifies your business type. If this code is incorrect, it could affect how the IRS views your deductions and whether certain expenses seem reasonable for your industry. While you can't change the code on the form, knowing what code was assigned can help you anticipate potential IRS questions.
Mistake #7: Forgetting About State Reporting
While this guide focuses on federal requirements, remember that most states also require income reporting. Boxes 6 through 8 on Form 1099-K contain state information. Don't forget to report your income on your state tax return as well IRS.gov.
What Happens After You File
Understanding the post-filing process helps reduce anxiety and prepare for potential IRS contact.
IRS Matching and Normal Processing
Once you file your tax return including Form 1099-K information, the IRS uses sophisticated computer matching programs to compare the amounts reported on your return with the Forms 1099-K submitted by payment processors. This automated system looks for discrepancies, underreported income, and missing returns.
If everything matches or if you've properly explained any differences, your return processes normally. You'll receive any refund you're owed, or you'll need to pay any taxes due by the April deadline (or October if you filed for an extension).
CP2000 Notices and Responses
If the IRS computer systems detect a discrepancy, you may receive a CP2000 notice (Proposed Changes to Your Tax Return) typically 12 to 18 months after you file. This isn't technically an audit, but rather an automated matching notice. The letter will explain what information doesn't match and propose additional tax, penalties, and interest. You have the right to respond, provide documentation, and explain the discrepancy. Many CP2000 notices are resolved simply by showing that you did report the income but perhaps on a different line of your return, or by providing evidence that the Form 1099-K included non-taxable amounts.
Audits, Penalties, and Amended Refunds
If the discrepancy is significant or your response to the CP2000 is unsatisfactory, the IRS may initiate a more formal examination or audit. During an audit, you'll need to provide detailed documentation supporting your reported income and expenses. This is why maintaining thorough records is critical.
Penalties can apply in various situations. If you underreport income, you may owe accuracy-related penalties (typically 20% of the underpayment). If the IRS determines the underreporting was fraudulent, penalties increase to 75%. Late payment penalties accrue at 0.5% per month on unpaid taxes. Interest compounds daily on unpaid tax balances.
Conversely, if you overpaid taxes because of an incorrect Form 1099-K and later receive a corrected form, you can file an amended return (Form 1040-X) to claim a refund, provided you do so within three years of the original filing date.
Most taxpayers who accurately report their income and maintain good records have no issues after filing. The Form 1099-K system is designed to increase transparency, not to create problems for honest taxpayers who make good-faith efforts to comply IRS.gov.
FAQs
Q1: I received a Form 1099-K, but I'm not self-employed and didn't run a business. What do I do?
This situation occurs more commonly than you might think, especially with payment apps. If the form reports personal transactions—such as roommates reimbursing you for rent, friends paying their share of concert tickets, or selling personal items for less than you paid for them—these generally aren't taxable income. Contact the payment processor immediately and request a corrected form. If you can't get one before the tax deadline, file your return with your correct income and include an explanation. The IRS has stated that taxpayers who receive Forms 1099-K for personal transactions should not report these as business income.
Q2: The amount on my Form 1099-K is much higher than my actual income. How do I handle this?
This is normal and expected. Form 1099-K reports gross receipts, which is the total of all transactions before any deductions. Your taxable income is the amount after you subtract business expenses, cost of goods sold, refunds, processing fees, and chargebacks. Report your actual net business income on the appropriate form (such as Schedule C) and maintain detailed records that reconcile the difference between the Form 1099-K amount and your reported income. The IRS understands this discrepancy, but you need documentation to support it if questioned.
Q3: I used a payment app for both business and personal transactions. How do I separate them?
Review your transaction history carefully and categorize each payment as either business income or personal/non-taxable. Create a detailed spreadsheet showing the Form 1099-K total, then list all non-business transactions with dates, amounts, and brief descriptions. The remaining amount should match your business income. Going forward, consider using separate accounts for business and personal transactions to avoid this problem. Many payment apps now allow you to designate transactions as business or personal, which helps with future reporting.
Q4: What if I receive multiple Forms 1099-K from different payment processors?
This is common if you sell on multiple platforms or use different payment methods. You must include income from all Forms 1099-K on your tax return. Add up the gross amounts from all forms, then subtract your total business expenses once to arrive at your net profit. Don't subtract the same expenses multiple times. Keep all forms with your tax records, as the IRS will have received copies of each one and will be matching them to your return.
Q5: Do I need to attach Form 1099-K to my tax return?
No. Form 1099-K is for your records and to help you prepare your tax return accurately. Do not attach it to your paper return or include it with an e-filed return. However, keep it with your tax records for at least three years in case of an IRS inquiry or audit.
Q6: What's the difference between Form 1099-K and Form 1099-MISC or 1099-NEC?
Form 1099-K reports payment card and third-party network transactions. Form 1099-MISC reports various types of income such as rent or royalties. Form 1099-NEC (starting in 2020) reports nonemployee compensation. The same income should not be reported on multiple forms. Under IRS rules, payments made with a credit card or through a third-party network must be reported on Form 1099-K and should not also be reported on Form 1099-MISC or 1099-NEC. This prevents double reporting of the same income.
Q7: I'm below the $20,000/200 transaction threshold for third-party networks, but I still received a Form 1099-K. Why?
Payment card transactions (credit/debit cards) have no threshold—all amounts are technically reportable. Additionally, some payment processors may voluntarily report below the thresholds. Some states have lower thresholds than federal requirements. Even if you receive a Form 1099-K, you still must report all your income on your tax return, regardless of whether you receive a form. The form is an information document to help with accurate reporting, not a determination of what's taxable IRS.gov.
Final Thoughts
Form 1099-K is a powerful tool for income transparency, but it requires careful attention and good record-keeping. By understanding what the form represents, how to reconcile it with your actual taxable income, and how to avoid common mistakes, you can file your taxes confidently and avoid potential issues with the IRS.
Remember that the gross amount on Form 1099-K is almost never your actual taxable income—it's a starting point. You're entitled to deduct legitimate business expenses, and you should not report personal or non-taxable transactions as income just because they appear on the form.
When in doubt, consult with a qualified tax professional who can review your specific situation and provide personalized guidance. The small investment in professional advice often pays for itself many times over by avoiding costly mistakes, maximizing legitimate deductions, and providing peace of mind during tax season.
For the most current information and updates about Form 1099-K, always refer to the official IRS website at IRS.gov/Form1099K and consult the detailed instructions at IRS.gov/pub/irs-prior/i1099k--2018.pdf.
This summary is based on official IRS publications and instructions for the 2018 tax year. Tax laws and reporting requirements may change over time. This document is for informational purposes only and should not be considered legal or tax advice. Consult with a qualified tax professional regarding your specific situation.
