Don’t fall for some of the falsehoods and misconceptions that have been spread about Form 1099-MISC and Form 1099-K
Tax stuff is hard enough for small business owners to begin with, but when you pile on all of the misinformation that exists out there on the internet, it can easily become overwhelming.
You have probably heard so many misconceptions—from “I don’t have to pay taxes if I had less than $600 in income” to “I don’t have to report income if I don’t get a 1099 for it”—and it can all lead you down a very bad path. I’ve heard it all, and every time I see something like this on social media, I want to scream.
I’m going to clear up these misconceptions today so that you understand what the IRS requires of you, and to save you time and money in the future. Don’t want to make the IRS mad? Keep reading to find out how to handle 1099-MISC and 1099-K correctly!
What Is a Form 1099-MISC?
Before we get to some common misconceptions, let’s clear up what these forms are actually for.
The 1099 forms report business income that you received throughout the tax year. If you run a business and earn income doing so, you’re probably familiar with them.
The Form 1099-MISC will be sent to you by a business for whom you did contract or freelance work. For example, if you designed advertising or marketing material for a business and the business paid you more than $600, that business is required to send you a Form 1099-MISC.
In contrast, if you cleaned an individual’s home, they would not be required to send you a Form 1099-MISC.
Businesses will send a copy of the 1099-MISC to both you and the IRS.
If you are a small business, the IRS requires that you issue a Form 1099-MISC “for each person to whom you have paid during the year:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment”.
What Is a Form 1099-K?
Financial institutions may send you a Form 1099-K, Payment Card and Third Party Network Transactions, if your business has accepted payment (bank or credit) card transactions from customers.
The 1099-K shows the total business income you made through that institution for the tax year. The financial institution will only send you the 1099-K if your business had 200+ transactions and $20,000+ in payments received during that tax year.
So, What’s the Difference between a Form 1099-MISC and 1099-K?
Both forms report business income for the tax year, but the 1099-MISC reports income you received from other businesses as a contractor or freelancer. It reports all business income you received in this way, no matter how you were paid (card or not).
The Form 1099-K reports only payments you received by bank or credit card from your customers or clients.
If you receive client payments through a payment processor, like Stripe or PayPal, you may receive a 1099-K from the payment processor AND a 1099-MISC from the client for the same income.
Misconceptions about Forms 1099-MISC and 1099-K
- I can’t file my taxes if my client doesn’t send me a form
Your clients might not be on the ball and may have forgotten (or might not know they’re required) to send you a Form 1099-MISC. You can ask or remind your client about the requirement, but you don't need to hound them or put off paying your taxes just because they haven't sent the form.
Because here’s the thing: the IRS doesn’t care that you didn’t receive your forms.
They expect you to be a prudent business owner. And as a prudent business owner, you should have detailed records of all income received in a calendar year. File your taxes in full and on time, relying on your own records, if you didn’t receive your forms. Instead of reporting the income from that client as 1099-MISC income, you can report it as other income.
- I don't have to report income if I don't get a 1099 for it
Oh my goodness, please, please, please do not fall for this one.
I’ve got a pretty similar answer for this one as #1: just because you didn’t receive a 1099 doesn’t mean you’re not required to report the income you made.
If you made business income, the IRS either already knows about it… or they’re not far away from finding out about it. Do yourself and your business a favor: report any and all business income you make.
- I don't have to pay taxes on payments under $600
Wouldn’t that be nice?
Unfortunately, it’s just not true. If you received less than $600 from a client you did contract work for, you won’t get a Form 1099-MISC, but you still have to report that income on your taxes, and you’re still taxed on it.
Likewise, if you received less than $20,000 in payment card payments and had less than 200 payment card transactions, you won’t receive a Form 1099-K from your financial institution, but (and I’m going to sound like a broken record here) the IRS still knows about it, you’re still taxed on it, and you still need to report it when you file your taxes. Yes, even if it’s less than $600.
What Do I Do with Form 1099-MISC and Form 1099-K?
Use your Form 1099-MISC and Form 1099-K to prepare your taxes. The information on each form should be used to file. You'll report the income from each 1099 on your Schedule C.
The IRS should have already been sent a copy of these forms, so you’re not required to send them in.
Important: Before you file, check that the information on your forms is correct. Businesses (and financial institutions) can make mistakes, and it’s essential that you check your forms against your own records.
If you are at all confused or having concerns about preparing your taxes correctly, consult a Certified Public Accountant and/or tax professional.
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