Person paying at cafe with contactless payment on phone.
Beginning Jan. 1, 2022, all third-party network companies, including Venmo, PayPal and Square, are required to issue 1099-K forms to merchants for card payments that exceed $600. — Getty Images/ ferrantraite

Effective Jan. 1, 2022, all third-party network companies (e.g., Venmo, Amazon, PayPal, Square, etc.) are required to issue 1099-Ks to merchants when card payments to the merchant exceed $600. Since the minimum sales threshold has been reduced from $20,000 to $600, more small businesses will be receiving Forms 1099-K going forward. As a result, many SMB owners might find themselves confused about what to do with the information and how to use it on their tax returns next year.

What is reported on a 1099-K form?

A Form 1099-K reports the gross amount of payment transactions from credit cards, digital payments via third-party networks (like Venmo and PayPal), and other freelance platforms that manage payments between two parties. Form 1099-K will only report third-party network transactions if they exceed the minimum threshold of $600. Businesses will receive 1099-K forms from each payment settlement entity they’ve used in the prior calendar year.

Keep in mind, this only applies to business transactions and does not include “personal” payments, like sending your roommate rent money or splitting a dinner bill with a friend on Venmo. On sites like PayPal, you can differentiate “family and friends” payments versus business transactions to ensure the platform categorizes payments correctly.

[Read: Understanding Peer-to-Peer Payment System Income Tax Reporting for Small Business]

Income thresholds for 1099-K forms

Prior to 2022, for most of the country, the sales threshold was $20,000, but it differed in a couple of states. Now, it will be $600 across the board, regardless of the number of individual transactions. This change was part of the American Rescue Plan Act passed in March and took effect on Jan. 1, 2022, for tax year 2022.

Going forward, if a business receives commercial payments of over $600 in a calendar year through an app like Venmo, that app must “file and furnish” a 1099-K form for that business. However, these changes will not impact this year’s tax season, which covers tax year 2021.

Starting now, in the 2022 tax year, businesses can expect to receive Form 1099-K if they earn over $600 in commercial transactions through payment apps like Venmo, Uber Eats, PayPal, Cash App, Qualpay and other popular services.

Who issues 1099-K forms?

Payment settlement entities like PayPal must report all payments made in settlement of payment card transactions (e.g., credit cards) and third-party network transactions (if exceeding the minimum threshold, which is $600 for tax year 2022 and beyond).

Starting now, in the 2022 tax year, businesses can expect to receive Form 1099-K if they earn over $600 in commercial transactions through payment apps like Venmo, Uber Eats, PayPal, Cash App, Qualpay and other popular services. These third-party networks will issue the forms themselves, and separate payments made through other accounts will not be counted toward these totals. For instance, if a merchant receives payment through an account serviced and funded directly from American Express, American Express will do the reporting.

These third-party settlement organizations will report both single transactions over the $600 threshold and multiple transactions that equal that threshold.

[Read: Choosing the Right Payment Methods to Accept at Your E-Commerce Business]

How to correct information on a 1099-K form

Receiving a Form 1099-K that holds incorrect information can be concerning, but it is typically a quick fix. According to the IRS, here are some common errors you might find on your 1099-K form:

  • The form doesn’t belong to you or is a duplicate.
  • Your taxpayer identification number (TIN) is incorrect.
  • The gross amount and/or number of transactions is incorrect.
  • The merchant category code (MCC) does not match your business.

To ensure your reported income is correct, the IRS recommends that you confirm your payment card receipt records and merchant statements match the amount on your Form 1099-K.

If you find any errors on your 1099-K form, whether it’s a misspelling of your name, wrong tax ID or a reporting inaccuracy, you can request a new form from the payment settlement entity (PSE) listed on your form. Just be sure to keep a copy of the corrected form and your associated correspondence with the PSE.

What to do if you receive a 1099-K form

If you receive a Form 1099-K, use the reported amount of income, along with other amounts received in the form of cash, checks and debit/credit payments when calculating your gross income during tax season. Make sure you keep documentation of all sources of income and deductions you report on your income tax return.

Whether or not you receive a 1099-K form from your payment processing apps, you should always be reporting accurate business income to the IRS.

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Published January 28, 2022