Payment processors, card networks, payment apps and online marketplaces report payments they process for businesses on Form 1099-K, Payment Card and Third Party Network Transactions. The IRS receives a copy, so the amount on the form needs to be explainable from your books.
Who issues it and when
Payment settlement entities issue Form 1099-K. For payment card transactions, reporting does not depend on a minimum amount. For payment apps and online marketplaces, the IRS states on its Form 1099-K page that they are required to send the form if payments for goods or services total over $20,000 in more than 200 transactions, although they may choose to send one for lower amounts.
Why the 1099-K never matches your sales
Form 1099-K reports the gross amount of payment transactions. It does not subtract:
- Refunds and chargebacks
- Processing fees deducted before payout
- Shipping and sales tax collected from customers
- Payments that were not income, such as reimbursements between friends that were mistakenly marked as goods and services
So the 1099-K total is usually higher than the deposits in your bank and different from the revenue in your books. That is expected. The important part is being able to explain the difference.
Reconciling 1099-K to your books
Each year we prepare a short reconciliation:
- Start with the gross amount on each 1099-K
- Subtract refunds and chargebacks recorded in the books
- Separate sales tax and shipping collected, if your books record them separately
- Compare the result with gross sales for that channel
If you record payouts from processors at their gross amount with fees as expenses, as we recommend in our ecommerce bookkeeping work, this reconciliation is straightforward.
Personal accounts and mixed use
Receiving business payments into a personal payment app account makes the 1099-K harder to explain and mixes personal and business transactions. Use a dedicated business account for business payments; see separating business and personal finances.
When the form is wrong
If a 1099-K includes payments that were not yours or not income, contact the issuer listed on the form to request a correction. Keep records that show what the payments were.
Avoiding double counting
A sale paid by card may appear on a 1099-K and, if the customer is a business, also in their records as a payment to you. Payments made by card or payment network are generally not reported on Form 1099-NEC by the payer, which avoids double reporting.
Reconciling a 1099-K to your books
- Download the annual summary or 1099-K from each platform or processor
- Run a report of gross sales recorded for that platform for the same calendar year
- List the reconciling items: refunds, chargebacks, fees, sales tax collected, shipping charged and timing differences at year start and end
- Keep the reconciliation with your tax records so any IRS question can be answered quickly
Key terms
Definitions for terms used in this guide, from our small business glossary:
- Chargebacks: A chargeback is a reversal of a card payment initiated by the cardholder's bank, often after a customer disputes a transaction.
