Most of the business owners who run online businesses receive 1099 K at the year-end. Confusing right? Generally, online business owners accept payments through credit/debit or third-party networks. Thus, payments made or received through a credit/debit are considered payment card transactions. This means payment cards or third-party networks are involved in processing the payment.
Getting confused? We will let you know why did you get an IRS Form 1099 K at the year-end. You will also get to know about the circumstances in which an individual receives the tax return. Find out what happens if you fail to report the 1099 income on the tax return below.
When does an individual get a 1099 K Form?
As per the IRS norms, an individual receives a 1099 K Tax Form if he/she accepts payments from credit/debit cards or third-party networks. Usually, IRS Form 1099 K is used to record payments made through payment cards or third-party network transactions. Specifically, these tax returns are used to report transactions made through a Payment settlement Entity. A PSE is a service that you use to process credit or debit transactions.
Besides, not everyone who uses PSE services will receive the tax form. If the following requirements are met, then you’ll receive 1099 K:
- Accept payments through credit/debit cards of $600 or more.
- Transactions you receive through third-party networks exceed $20,000 in a tax period.
- The individual payments you receive are more than 200.
Who issues Form 1099 K?
According to the IRS rules and regulations, the Payment Settlement Entity issues Form 1099 K to the business owners. Furthermore, third-party networks like PayPal, Amazon, etc required to report the transactions using 1099 K. For example, if you sell products online and accept payments through PayPal or Amazon or credit/debit cards.
If the individual payments through credit/debit cards exceed $600, then you’ll receive 1099 K. The credit card processor is responsible to issue the tax form with the due date. Besides, if the individual payments made through third-party networks exceed $20,000 with 200 transactions, you’ll receive Form 1099 K. The third-party processor will issue the tax returns with the key date.
Are Federal 1099 K Forms reported to the IRS?
Yes. Each and every 1099 Tax Form must be reported to the Internal Revenue Service. The IRS requires the payments made to contractors apart from regular salary to be reported on 1099 information returns. However, 1099 Tax Forms are also known as “information returns”. Because they provide information to the IRS about the payments made to an individual who is not treated as an employee.
Therefore, Federal Form 1099 K is also reported to the IRS. Previously, business owners used to report transactions made to contractors on a 1099 MISC. To stop underreporting income every business must record the payments made using payment cards on 1099 K.
How much Tax Do you pay on a 1099 K income?
Generally, independent contractors pay “self-employment taxes” and “income taxes”. Furthermore, there is no withholding of taxes for a contractor from the 1099 income like employees. Thus, contractors owe money to the IRS at the end of the year for the income earned apart from salary. Because the IRS taxes an individual as self-employed. Besides, if you earn more than $400 in a tax year, you need to pay “self-employment tax”. Self-employment taxes include Medicare and Social taxes of nearly 15.3% on the income earned. Apart from these, you need to keep nearly 30-35% aside for paying taxes if you earn 1099 income. Because you can’t estimate how much tax you owe to the IRS. It completely depends on the amount of income earned and the status of an individual.
What happens if I didn’t file my 1099 K?
If you fail to include 1099 income on the income tax return form, you will get audited by the IRS. Yes, the IRS considers it as underreporting income and imposes heavy and hefty penalties. As we know, each 1099 Tax Form is issued to the contractor and to the IRS. The IRS checks the information reported on the 1099 Tax Forms. Finally, matches it with the payee’s income tax returns form. Therefore, checks whether the payee is including 1099 income on the tax return or not. So, to avoid IRS audits, or penalties it is better to file income tax returns by including 1099 income.
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