With the rise of the gig economy and the increased reliance on digital payments, more people are receiving IRS Form 1099-K, Payment Card and Third Party Network Transactions, than ever before. The form plays a critical role in reporting income received through third-party payment platforms like PayPal, Venmo, or Stripe. Here’s a sample scenario to help illustrate how and why a freelancer might receive Form 1099-K, and what to do with it when tax season rolls around.
The Scenario: Jane, a Freelance Graphic Designer
Jane is a self-employed graphic designer who takes on various projects for clients around the world. To make the payment process simple, Jane uses PayPal to invoice her clients and receive payments. Over the course of 2023, Jane completed several projects and was paid by her clients through PayPal. By the end of the year, Jane had received a total of $8,000 in payments.
As January approaches, Jane receives a Form 1099-K from PayPal in the mail. This form reports the total gross payments PayPal processed for her services during the year. Let’s break down what this means for Jane.
Why Jane Received a 1099-K
The IRS requires third-party payment processors like PayPal to issue Form 1099-K to users who meet certain thresholds for payment processing. As of 2023, the threshold is $600 or more in gross payments in a calendar year for transactions related to goods or services. Since Jane received $8,000, which is well above the $600 threshold, PayPal is required to send her a 1099-K.
This form serves as a report to both Jane and the IRS of the total amount she received through PayPal during the year. PayPal is not reporting Jane’s profits, just the gross income from payments made through their platform.
The Bigger Picture: IRS Compliance
Form 1099-K was introduced to help the IRS track income from payment card and digital payment networks, ensuring that self-employed individuals, small businesses, and other income earners accurately report their earnings. In the past, it was easier for certain income streams to go unreported, especially from online sales or gig economy work. With Form 1099-K, the IRS gets a clearer picture of these income sources and can enforce compliance.
For Jane, receiving a 1099-K means ensuring that her tax return accurately reflects her income from freelance work. If she doesn’t report the payments shown on the form, the IRS could flag her return, resulting in penalties or additional taxes owed.
