Self-employment is awesome. Being your own boss, setting your own work pace and time, and best of all, claiming business expense deductions!
But what about taxes? Just like every earning professional, a self-employed individual, too, has to pay taxes. However, for self-employed individuals, entrepreneurs, and freelancers, taxes can get a bit tricky as there are two forms – Form 1099-MISC and Form 1099-K. Although the two forms may look similar, each serves a different purpose. Thus, it is important that you know which form you should use to report your income from your business or profession.
Form 1099-MISC and Form 1099-K
While Form 1099-MISC and Form 1099-K are both used to report income one makes during a particular tax year, Form 1099-MISC reports income of a business, Form 1099-K is used to report bank card income gained from a business’ clients.
Businesses or self-employed individuals (small business owners, freelancers) that earn over $600 are issued a Form 1099-MISC. If you are a wage earner earning less than $600, you might not be issued a 1099-MISC form but irrespective of that you have to report all your income on Form 1099-MISC.
If you are reporting your income on Form 1099-MISC, you can also claim deductions against your income on Schedule C.
Form 1099-K, a.k.a. Payment Card and Third Party Network Transactions, is used to report income of financial institutions that accept payments via bank transactions, credit cards, or debit cards. In such a case, you are required to send your clients/customers Form 1099-K if they have had at least two-hundred transactions and made a minimum of $20,000 in payments to you.
A business need not send a Form 1099-MISC to its clients if it is not incorporated as a C Corporation or an S Corporation. However, financial institutions must send a Form 1099-K to every business that holds bank card revenue, irrespective of whether or not they are incorporated.
Is it possible for your income to be reported on both the forms?
Yes, it is possible that your income may get reported on both Form 1099-MISC and Form 1099-K. This happens only when you own a large business (that’s incorporated) and you also accept credit/debit card payments. So, while you need to send your clients Form 1099-MISC displaying the payment, you will also have to send Form 1099-K to your clients since you accepted card payments. In such an instance, a client’s income will be reported in both the forms.
One thing that you should keep in mind about Form 1099-K is that it displays the gross amount paid by your clients/customers, that is, the gross income that you earn in a particular year. And after deducting your bankcard processing fees, you get a little less than the gross amount declared in Form 1099-K.
Got any other queries? Ask our tax experts today! Write to us at firstname.lastname@example.org or call us at 1-(888)-482-0279.