Form 1099-K: Merchant Card and Third Party Network Payments (2021)
If you've received payments through a credit card, debit card, or payment app like PayPal or Venmo as part of your business activities, you may receive Form 1099-K. This guide will walk you through everything you need to know about this important tax form for the 2021 tax year.
What Form 1099-K Is For
Form 1099-K is an information return that reports the total amount of payment card and third-party network transactions you received during the calendar year. Think of it as a receipt from payment processors showing how much money came through their systems to your business.
Payment settlement entities (PSEs)—which include banks that process credit card payments and third-party settlement organizations like PayPal, Square, or Stripe—are required to send this form to both you and the IRS. The form tracks two main types of payments:
Payment card transactions: Any payments you received through credit cards, debit cards, or stored-value cards (including gift cards). These are the swipe-and-pay transactions at your business.
Third-party network transactions: Payments processed through payment apps and online marketplaces where buyers and sellers connect through a central platform that guarantees payment to the seller.
The form doesn't mean you owe additional taxes—it's simply a reporting mechanism. The IRS receives a copy, so they can verify that you're reporting all your business income on your tax return. All income is taxable whether or not you receive a 1099-K, but this form helps ensure everyone stays honest about what they earned. IRS.gov
When You’d Use Form 1099-K (Late Filing/Amended Returns)
Deadlines for 2021
For the 2021 tax year, payment processors had specific deadlines: they must send Form 1099-K to you by January 31, 2022, and file it with the IRS by February 28, 2022 (if filing on paper) or March 31, 2022 (if filing electronically).
Corrected Forms and Amended Returns
If you discover errors on your 1099-K or receive a corrected form after you've already filed your tax return, you may need to file an amended return using Form 1040-X. Here's what to do:
If you receive a corrected 1099-K before filing: Simply use the corrected information on your original tax return. No special action is needed.
If you receive a corrected 1099-K after filing: First, check whether the correction actually changes your tax liability. If the amount reported is different from what you included on your return, file an amended return. You generally have three years from the original filing deadline to amend your return and claim any refund.
If You Receive a 1099-K in Error
Contact the issuer immediately and request a corrected form showing zero in all boxes. If you can't get a correction, report the issue on Schedule 1 of your Form 1040 with an explanation. IRS.gov
If You Never Received an Expected 1099-K
You're still required to report all income. Don't wait for the form—report your income based on your own records.
Key Rules or Details for 2021
Payment Card Transactions
There is no minimum threshold. Even a single dollar processed through credit cards, debit cards, or stored-value cards can trigger a 1099-K. In practice, PSEs typically report all card transactions.
Third-Party Network Transactions
A 1099-K is issued only if both of these conditions are met:
- Gross payment transactions exceed $20,000, and
- There are more than 200 transactions
It's critical to understand that this is an "AND" requirement. If you had $25,000 in payments but only 150 transactions, you wouldn't receive a 1099-K. Similarly, if you had 300 transactions totaling $15,000, you also wouldn't receive one.
Important: The threshold determines whether you receive a 1099-K—it does not determine whether your income is taxable. All business income is taxable regardless of whether you receive this form.
Gross Amount Reporting
The form reports gross amounts—meaning the total dollar amount without deducting fees, refunds, credits, or other adjustments. If you received $10,000 in payments but paid $300 in processing fees, the form will still show $10,000. You'll deduct your business expenses, including those fees, separately on your tax return. IRS.gov
Foreign and Non-Reportable Transactions
Foreign Transactions: The 2021 rules include specific exceptions for payments made outside the United States. Generally, payment processors don't need to file Form 1099-K for payments to foreign accounts unless there's a U.S. address associated with the account, standing instructions to transfer funds to a U.S. bank account, the payee requests payment in U.S. dollars, or the processor knows the payee is a U.S. person.
Non-Reportable Transactions: ATM withdrawals, cash advances against your card, checks issued in connection with payment cards, and transactions where the merchant and card issuer are related companies are all excluded from Form 1099-K reporting.
Step-by-Step (High Level)
Step 1: Review for Accuracy
Immediately check the information on the form. Verify your name, taxpayer identification number (TIN), and most importantly, the gross payment amount in Box 1a. Compare this to your own business records.
Step 2: Understand What's Reported
Look at the breakdown by month (Boxes 5a through 5l) and the number of transactions (Box 3). Box 1b shows "card not present" transactions, which typically includes online, phone, and mail-order sales. Box 2 shows the merchant category code that classifies your business type.
Step 3: Reconcile With Your Records
The 1099-K shows gross receipts—before deducting refunds, chargebacks, fees, or other adjustments. Calculate your actual net income by subtracting legitimate business expenses. This reconciliation is crucial because your tax return should reflect net business income, not gross receipts.
Step 4: Report on Your Tax Return
Business income from Form 1099-K is typically reported on Schedule C (for sole proprietors), Schedule F (for farmers), or the appropriate business tax return for partnerships and corporations. Don't attach the 1099-K to your tax return—keep it with your records. The IRS already has a copy.
Step 5: Address Discrepancies Immediately
If the amount on the form doesn't match your records, contact the payment processor right away. They can issue a corrected form. Keep documentation of your attempts to resolve any errors. IRS.gov
Common Mistakes and How to Avoid Them
Mistake #1: Reporting Gross Amounts as Income Without Deducting Expenses
The 1099-K shows gross receipts—don't report this as your taxable income. Calculate your net profit by subtracting all legitimate business expenses including processing fees, cost of goods sold, supplies, and other deductible expenses.
Mistake #2: Ignoring Personal Transactions Mistakenly Reported
Sometimes payment processors issue 1099-Ks for non-business transactions like reimbursements from friends, family gifts, or selling personal items at a loss. These aren't taxable income. If this happens, contact the issuer for a correction. If they refuse, report the amounts and offset them with an explanation on Schedule 1.
Mistake #3: Forgetting State Reporting Requirements
Some states have lower thresholds than the federal rules. Even if you don't meet the federal threshold, you might still need to report in your state. Check your state's specific requirements.
Mistake #4: Treating Backup Withholding as Optional
If you failed to provide your TIN to the payment processor, they're required to withhold 24% of payments for backup withholding (shown in Box 4). This is not optional—claim it as a credit on your tax return or you'll lose that money.
Mistake #5: Not Keeping Separate Business and Personal Accounts
Mixing personal and business transactions makes reconciliation nightmarish. Use dedicated business accounts for all business-related payments to simplify your record-keeping and avoid confusion when your 1099-K arrives.
Mistake #6: Assuming No 1099-K Means No Reporting Requirement
Even if you don't receive a 1099-K because you didn't meet the thresholds, you must still report all business income. Keep detailed records of all transactions regardless of whether you receive information returns. IRS.gov
What Happens After You File
If Everything Matches
Your return processes normally. You'll receive any refund you're owed or a confirmation if you paid the correct amount.
If There's a Discrepancy
The IRS may send you a notice (typically a CP2000) showing the difference between what you reported and what they received on information returns. This isn't an audit—it's an automated matching notice. You have the right to respond explaining any legitimate differences, such as expenses that reduced your gross receipts to net income.
Audit Implications
Having a 1099-K doesn't increase your audit risk—in fact, it may decrease it because the IRS knows your income is being reported by third parties. However, large discrepancies between reported income and your lifestyle (like claiming $15,000 in income while making $50,000 in car payments) can trigger scrutiny.
Record Retention
Keep your 1099-K forms and all supporting documentation for at least three years from the date you filed your return, or two years from the date you paid the tax, whichever is later. The IRS recommends keeping business records for at least seven years to be safe.
Future Years
Once you're receiving 1099-Ks, expect them annually as long as you continue meeting the reporting thresholds. Payment processors keep your information on file, so subsequent years should go more smoothly. IRS.gov
FAQs
Q1: Do I need to report the full amount shown on Form 1099-K?
No. The form shows gross receipts—the total amount processed before any deductions. You report your net income after deducting legitimate business expenses. However, be prepared to show how you calculated your net income if the IRS asks. Your gross receipts should match or reasonably approximate the 1099-K amounts.
Q2: What if I sell personal items online—is that taxable?
Generally, no. If you're selling personal items for less than you paid for them, there's no taxable gain. For example, selling your used furniture on Craigslist or Facebook Marketplace at a loss isn't taxable. However, if you're regularly buying and reselling items for profit, that's a business and is taxable. The key distinction is intent: casual sales versus business operations.
Q3: Can I ignore a 1099-K if the amount is wrong?
Never ignore it—the IRS received a copy and expects to see that income on your return. If it's wrong, contact the issuer immediately to request a corrected form. If they refuse or you can't get a correction in time, report the income and then adjust it with an explanation. Documentation is key.
Q4: What's the difference between Form 1099-K and Form 1099-NEC?
Form 1099-NEC reports nonemployee compensation paid directly by clients (like freelance work). Form 1099-K reports payments processed through payment cards or third-party networks. You might receive both for the same business if some clients pay you directly and others pay through platforms. Don't double-report the same income—carefully reconcile all forms against your records.
Q5: Do payment app transactions between friends and family count toward the threshold?
They shouldn't, but it depends on how transactions are coded. Most payment apps distinguish between "goods and services" (business) and "friends and family" (personal) transactions. Only business transactions should count toward 1099-K thresholds. If personal transactions are mistakenly included, contact the payment processor for a correction.
Q6: What if I run my business through multiple payment processors?
Each processor reports independently. You might receive multiple 1099-Ks from different entities. Carefully total all the amounts when preparing your tax return, making sure you don't omit any processor's payments.
Q7: Will I receive a 1099-K from my foreign payment processor?
It depends. Non-U.S. payment processors may not be required to file Form 1099-K, especially if you have a foreign address and they don't know you're a U.S. person. However, you're still required to report all worldwide income regardless of whether you receive information returns. U.S. taxpayers must report all income, domestic and foreign. IRS.gov
Sources
All information in this guide comes from official IRS publications including the 2021 Instructions for Form 1099-K, IRS Form 1099-K FAQs, and About Form 1099-K available at IRS.gov.
Note: Tax laws change frequently. This guide covers the 2021 tax year rules. For the most current information, always consult IRS.gov or a qualified tax professional.
