Contributed by: Daniel_L, FreeTaxUSA Agent
Form 1099-K
Form 1099-K reports electronic payments received for goods or services through credit cards, debit cards, or any other third-party payment network like Square, Venmo, or PayPal.
The 1099-K “filer” or issuer records these transactions. When the threshold is met by dollar amount and number of transactions the issuer sends a copy of the form to you, the IRS, and any necessary state tax entity providing a summary total of the reportable income your account received during the year.
The transactions are commonly identified and reported on your tax return as one of three income types:
- Personal, which may be further identified and entered as follows:
- Personal payments for shared costs (“amounts reported in error” and nontaxable),
- Personal items sold for loss (nontaxable), and/or
- Personal items sold for gain (taxable)
- Business (taxable)
- Rental (taxable)
You can verify the amount reported as “gross amount of payment” (box 1a) using records that detail each received payment transaction. These records may be the issuer’s year-end or other statements, which are normally found within your account tied to the issuer, as well as any other personal, business, or rental records in your possession.
Use these records to identify the income type of each transaction. Then use the income type to determine where to enter the income in our software. When multiple income types are reported on one or more 1099-K forms, you’ll split the total amount reported between FreeTaxUSA software’s income entries (Personal, Business, Rental). When multiple 1099-K forms are received, you’ll generally group each identified income type across the forms for one total entry amount for that income type.
My 1099-K amount is wrong
When someone’s simply paying you back for something, these personal payments for shared costs are considered nontaxable personal transactions.
Examples of nontaxable personal payments for shared costs include:
These transactions shouldn’t be included in total income on the 1099-K.
Issuers of the form are getting better at identifying and excluding these types of transactions. However, an issuer may still be unable to distinguish between transaction types on their platform, or even when they’ve correctly excluded some transactions, they may simply make a mistake when totaling the income that should be included on the form.
This means you may get a 1099-K reporting nontaxable income when you shouldn’t have received one at all. It may also mean the 1099-K you’ve received is wrong because it reports an incorrect amount for total income (box 1a),meaning the issuer or payer included some or all your nontaxable income transactions with your reportable income transactions.
If your 1099-K includes any amount of received payment(s) for shared cost(s) like the ones described above, then the amount shown on your 1099-K is considered incorrect. The total incorrect amount is also referred to as the “amount included in error.”
How to correct amounts included in error
The best way to fix this error is to request the issuer send a corrected 1099-K excluding the amount. Then use the new form to prepare your return. However, when a corrected 1099-K won’t be issued, or you’re unable to request and receive a corrected 1099-K in time to file your tax return, you can:
To do this in our software, complete these three steps:
- Use the menu path:
Income> Business Income> 1099-K Income - Find the question asking if you’ve received an incorrect 1099-K and mark it Yes.
- As you continue through the 1099-K income screens, you’ll watch for the entry to record the amount that shouldn’t be included on your 1099-K form(s).
The amount you enter here should be the total of incorrectly reported payments shown on all 1099-K forms you received for the tax year. You may want to have your own record identifying each 1099-K’s incorrectly reported payment amounts, but for tax filing purposes, you’ll group and report all 1099-K incorrect amounts together.
FreeTaxUSA software will report it appropriately on your tax return so the amount is no longer identified as taxable income for the year.
What it may look like on your tax form
Enter and save the amount that shouldn’t reported as shown here:
The total amount will be reflected on your return. Currently, it’s reported at the top of Schedule 1 as shown here:
Please note this tax form line includes both incorrect amounts (amount “included in error”) AND personal items sold at a loss. They appear as a sum.
When you need to report both personal income types as seen here:
The combined amount is reflected on the tax form as seen here:
As a reminder, form 1099-K reports payments you got for goods or services received during the year. It helps identify taxable income. Your 1099-K issuer or “filer”, is required to send a copy not only to you but also to the IRS and the state. They may review their copies when processing your tax returns. The text highlighted in green in the last picture indicates the IRS and state will be looking to account for the total income reported on your 1099-K.
This means that even though nontaxable income is typically not reported, personal payments for shared costs do need to be reflected on your tax return when they’re incorrectly reported on a 1099-K.
Remember, although the amounts appear on your tax return, they’re not included in your taxable income for the year. Review the last picture showing the amount isn’t listed in any sectioned part of Schedule 1. It is only included at the top—serving only as an explanation of all/part of your 1099-K reported income.