What the 1099-K Requirements Mean for Your Connecticut Small Business
“Change is inevitable, except from a vending machine.” – Robert C. Gallagher
If tax legislation can change, it will change. That’s a principle we’ve come to live by here at Blue Horizon Tax Advisors. Very Newton-esque.
While this tax season may feel relatively calm in some areas, there is one thing that did change: the 1099-K reporting threshold. If you’re running an online store, driving for a rideshare app, selling crafts on Etsy, or accepting payments through third-party settlement organizations (TPSOs) at your brick-and-mortar shop, this applies to you, so read on.
What’s changed?
1099-K reporting thresholds are still shifting for those businesses that receive payments through TPSOs (like PayPal, Venmo, and CashApp).
The original threshold was $20K and at least 200 transactions. The threshold for this year and onward will look like…
– Tax year 2024 (reporting in 2025): $5K threshold.
– Tax year 2025 (reporting in 2026): $2.5K threshold.
– Tax year 2026 (reporting in 2027) and after: $600 threshold.
So, if you made at least $5K in sales last year through card payments or TPSOs, a 1099-K from each payment platform should have landed in your physical or digital mailbox by January 31st this year (after they file the form with the IRS).
How do you file a 1099-K?
That’s actually a trick question because YOU don’t file it. The TPSOs and credit card companies do. They report the transactions to the IRS using Form 1099-K, and they send you a copy.
But even though you don’t file it, you’re still responsible for what’s on it. You need to review that copy to make sure that it’s accurate, and the numbers match your financial records. Because if you have a mismatching 1099-K and tax return, it’ll flag the IRS to take a closer look.
Here’s how to verify it:
FIRST… make sure all the transactions listed on the form truly are business, not personal, transactions. Getting reimbursed for dinner out with a friend should not be on your 1099-K. Payments from customers through your online shop should. (This is where it’s really necessary to keep your business and personal transactions separate).
THEN… check your records. Look over the form and check, month by month, that the sales match what your records show (including processing fees and refunds). Really go in with a fine-toothed comb here – getting the details right could be what saves you from IRS trouble later.
ALSO… note that your 1099-K only reports gross sales. So, you need to properly account for things like refunds, chargebacks, fees, and business expenses to avoid overpaying on your taxes.
Will 1099-K changes affect your bottom line?
That depends – if you’ve been practicing good bookkeeping, and can perform a detailed verification that the credit card and TPSO transactions you’ve made match what’s reported on your 1099-K, then no.
BUT… if the numbers are off and your business comes under IRS scrutiny, then yes, your bottom line will suffer for it.
So, you must make sure the amount on your 1099-K accurately reflects what you made in gross sales in 2024 (which you’ll report on your tax return).
And if you find that something’s off, you need to make it right by contacting the payment processor (not the IRS) for a corrected form.
What’s in it for you?
Your 1099-K gives you a report of your credit card transactions, which can help you identify some deductible expenses, like…
– Fees charged by TPSOs or credit card processors
– Costs to produce or purchase the items you sell (like raw materials, packaging, and direct labor costs)
– Web hosting fees if you sell online
– Internet access payments
– Advertising costs
Of course, this isn’t an exhaustive list. It’s just meant to spark inspiration (and help you make some lemonade out of the situation).
Ultimately, staying informed and maintaining meticulous records are your best defenses here.
Remember: Any income you make should be reported, with or without a 1099-K coming your way. I know navigating something like this can be scary, especially when there’s the potential for an audit involved. If you’re feeling at all nervous about dealing with your 1099-K requirements this tax season, come talk to me. My schedule is open:
calendly.com/bhta-mm/meeting
Keeping you in the know,
Matthew Mazotas