Form 1099-K: Why the IRS Sees Your Gross Card Sales (The Return, Part 3)

This article goes with Part 3 of "The Return." The characters are fictional; the rules are real.

In Part 3, Marisol sits in a booth at her client Héctor's restaurant. The mismatch on his IRS letter is $112,000, and it all came from one form. Héctor waves it off: "That's the card machine. It's not profit. Half is tips, half goes back out."

He's half right. And that half is why he got the letter.

What Form 1099-K reports

Form 1099-K, Payment Card and Third Party Network Transactions, is filed by companies that process payments for you:

• Card processors (the company behind your card terminal) report payment card sales
• Third-party settlement organizations (payment apps and online marketplaces) report payments for goods and services

The form shows the gross amount: every dollar that went through, before refunds, fees, chargebacks, tips paid out to staff or the cost of anything you sold. The IRS gets a copy.

The federal reporting threshold for payment apps and marketplaces has changed several times in recent years. Card processors report payment card sales regardless of amount. Check the current Form 1099-K instructions for the threshold that applies to the year you're filing.

Why the IRS sent the letter

When the 1099-K shows $112,000 and the return doesn't show those receipts, the IRS's matching system can't tell that the money went to food costs, staff tips and rent. It sees $112,000 missing, and proposes tax on it. That's a CP2000. (See Part 1: what a CP2000 really means.)

How to report it right

On a Schedule C, a 1099-K amount belongs in gross receipts, along with cash sales and everything else. Then the costs come off below it:

• Returns and allowances (refunds)
• Cost of goods sold
• Card processing fees
• Wages, including tips paid out through payroll
• Rent, supplies, and every other business expense

The return then shows the gross the IRS expects to see, and the profit that's actually taxable. IRS Publication 334, Tax Guide for Small Business, explains each line.

The secret: if a 1099-K includes money that isn't income at all, like a personal payment from a friend, a reimbursement for a shared dinner, or something you sold for less than you paid, don't leave it off the return. The IRS's Form 1099-K guidance describes how to report the amount and then back out the part that isn't taxable, so the form still "matches." Leaving it off is what triggers the letter. Showing it and explaining it is what stops one.

Keep the records that prove it

The 1099-K proves money came in. Only your records prove where it went:

• Processor statements, monthly
• Payroll records showing tips paid out
• Receipts and invoices for costs
• Bank statements

IRS Publication 583, Starting a Business and Keeping Records, covers what to keep and for how long.

A worked example

Here's how a small business might show a 1099-K on Schedule C (numbers made up for illustration):

Line	Amount
Gross receipts: card sales (matches 1099-K)	$112,000
Gross receipts: cash sales	$28,000
Total gross receipts	$140,000
Returns and refunds	($3,000)
Cost of goods sold (food, supplies)	($52,000)
Card processing fees	($3,400)
Wages, including tips paid through payroll	($38,000)
Rent and utilities	($24,000)
Other expenses	($6,600)
Net profit	$13,000

The IRS sees $112,000 on the 1099-K and finds $112,000 included in gross receipts. No mismatch. Tax is figured on the $13,000 profit, plus the cash sales that were properly included.

Common 1099-K mistakes

• Reporting only net deposits. Your bank deposits are after fees and refunds. The 1099-K is before. Report the gross and deduct the fees.
• Two 1099-Ks for the same money. If a marketplace and a payment app both report the same sale, ask for a corrected form, and keep records showing the duplication.
• Personal accounts used for business. Mixing them makes everything harder to prove. Use a separate account for the business.

For preparers

Ask every business client for every 1099-K, and compare the total with the gross receipts on the return before you sign. If gross receipts are lower than the 1099-K total, there has to be a documented reason, such as a duplicate form or personal payments that were backed out as the IRS describes. A two-minute comparison at the desk prevents the CP2000 that Marisol spends four episodes cleaning up.

In the show

Marisol says: "Then we show them where it went. Receipts, payroll, tip reports." Then Héctor slides a second ledger across the table. "Which books do you want?" That's Part 4: cash is income.

Follow The Return

New episodes on Instagram @taxwallet.ai.

FAQ

Is a 1099-K amount taxable income?

It's a report of gross payments. Your taxable profit is what's left after business costs. The gross still has to appear on the return.

I got a 1099-K for personal payments. What do I do?

Report it and back out the non-taxable amount as the IRS describes in its Form 1099-K guidance, so the return matches the form.

Do card sales under the app threshold need to be reported?

Yes. All business income is taxable whether or not you get a form.

What if the 1099-K is wrong?

Ask the issuer for a corrected form. Keep your records showing the correct amount.

General information, not tax advice.