At the beginning of every tax season, you receive informational tax forms in the mail from your places of employment, financial institutions and all other organizations you did business with throughout the year that the Internal Revenue Service wants to hear about.
If you’re an entrepreneur, a freelancer or otherwise self-employed, two of those forms may look very similar. Form 1099-MISC and Form 1099-K appear the same, but they serve different purposes. To correctly report your income this coming tax season, it’s important to understand what each of those forms tells you.
Form 1099-MISC and Form 1099-K both report income
Form 1099-MISC and Form 1099-K report business income you received during the tax year. You and the IRS receive both forms.
The purposes of the forms are different
Businesses send Form 1099-MISC, Miscellaneous Income, if you earn more than $600 in freelance work or contract labor during the year. Private individuals who are not in business are not required to send you Form 1099-MISC. For example, if you provided carpet cleaning to someone’s home, that person will not send you Form 1099-MISC. If you design marketing collateral for a local business, however, they must send Form 1099-MISC to you if they paid you $600 or more for the work.
Financial institutions may also send Form 1099-K, Payment Card and Third Party Network Transactions, if you accept bank card transactions for payment. The form shows your total bank card revenue for the year. The financial institution is required to send you the form if you have at least 200 transactions and at least $20,000 in payments during the year.
In other words, Form 1099-MISC reports income from a particular business, regardless of the form of payment. Form 1099-K reports bank card income from all your customers and clients.
Corporation requirements aren’t the same
Businesses are generally not required to send you Form 1099-MISC if your business is incorporated and treated as an S Corporation or a C Corporation.
However, financial institutions must send Form 1099-K to all businesses with bank card revenue, regardless of whether they are incorporated. Non-profit organizations also receive Form 1099-K.
Income can get reported twice
It’s possible for some income to show up twice – on Form 1099-MISC and Form 1099-K. For example, let’s say you clean carpets for a large business and earn $1,000. You also accept a credit card for payment. The business sends you Form 1099-MISC showing the payment. Because you accepted payment via credit card, Form 1099-K will also report that payment. For that reason, it’s important to keep good records to avoid paying income and self-employment tax on the same money twice.
You may notice discrepancies with Form 1099-K
Form 1099-K shows the gross amount of income paid by your customers. Generally, you receive a smaller amount after bankcard processing fees are taken out.
Don’t worry – you don’t pay tax on the gross amount. Be sure to report your fees and other expenses on your return to calculate your tax based on your net income. TaxAct can help make those calculations easy so you don’t have to wonder if you’re overpaying in taxes.
Source : TaxAct Blog