Decoding the 1099-K for Photographers
AS OF 11/21/2023, THE THRESHOLD HAS CHANGED AGAIN. PLEASE BE SURE TO READ THE BLOG BELOW AS WELL
👉 2023 1099-K Laws Changed… Again
Understanding the 1099-K impact on payments
The realm of photography is abuzz with talk and uncertainty surrounding 1099 Ks, especially in light of impending changes. For photographers, it's imperative to grasp the implications and adopt best practices associated with these tax forms. This blog post aims to dissect key insights about 1099 Ks, providing clear guidance for photographers.
Unraveling the complexities of tax forms, 1099 Ks specifically report third-party network transactions. There are several 1099 forms utilized each year (IE, 1099-NEC, 1099_MISC, etc), but the 1099-K has become the focus of much attention due to changing tax laws.
The Housing and Economic Recovery Act of 2008 introduced the new requirement for banks and credit card merchants to report payments to the IRS, with 1099-Ks first issued in 2012. This form has been in existence for about 11 years.
Who gets a 1099-K?
Photographers using a third-party payment processor to facilitate transactions may receive a 1099-K. Third-party processors include credit cards, Stripe, Square, PayPal, Venmo, HoneyBook, and Dubsado, to name a few.
What is a third-party payment processor?
The IRS explains that “Third-Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement.”
This would be anything like a credit card, Stripe, Square, PayPal, or Venmo.
But note that it is only the business accounts for Venmo and PayPal, not the friends and family or the free ones.
Or CRMS with built-in payment processing like HoneyBook, for example (they have been sending emails out to let Photographers know about the new 1099-K Laws)
⚠️Friends and family accounts do not charge fees and should not be used for business. It's against their terms of service.
If the organization charges the seller (you) a fee for facilitating the transaction, that is a third-party processor.
What is NOT a third-party payment processor?
It's also important that I'm clear on what methods do not count
Payments made by check, cash, or debit card and through platforms like Zelle, PayPal, or Venmo under friends and family accounts do not qualify. It's crucial to distinguish between business and personal transactions.
Who issues 1099-Ks, and when will I receive it?
Before 2023, Third-party payment processors have to issue a 1099-K if you have transactions over $20,000 AND 200 transactions. For example, if you received over $200,000 from PayPal AND 200 Transaction from billing clients through Paypal Business, then you would receive a 1099-K
This is where a lot of the buzz has been lately because beginning 1/1/2023 the threshold for 1099K is now the same as 1099Misc & 1099NEC, which is $600 OR more. This bridges the gap to ensure everyone is reporting how they should.
This was supposed to take effect for our 2022 Tax year but was pushed to 2023 in December 2022.
But now it is here, so we need to be sure we understand it.
For 2023, this has changed from $20,000 to $600, and the transaction minimum will be gone just like every other 1099 form.
State Rules
Also, keep in mind this is for the IRS. Your state may require a 1099-K to be issued based on different criteria, so be sure to check with your state’s Department of Revenue.
Mailing Deadline
If you meet the requirements to receive a 1099-K, you should receive it by January 31 of the current tax year for last year's transactions.
How does the 1099-K affect payments to contractors?
I won't cover 1099-NEC or 1099-MISC, but you can click the links to read specific blogs about those forms.
Remember, you need to track what you pay anyone who's NOT an employee for services.
if you need a refresher on contracted labor, read this blog.
You're required to have a filled-out and signed W-9 on file before paying any contractors. We use the information on the W-9 to know if we need to track payments. We also use the information on the W-9 in January to report what you paid that contractor for the prior tax year on form 1099-NEC
If you paid them $600 or more.
Compare 1099-K to 1099-NEC
Both forms report payments to self-employed individuals. The 1099-K covers payments from debit cards, credit cards, and third-party payment platforms, while the 1099-NEC records payments from cash, checks, direct deposits, and electronic funds transfers. The 1099K reports monthly, while the 1099-NEC reports annually.
Handling Mixed Transactions
To fully illustrate this, I am going to walk through a few example scenarios -
Scenario 1
Fancy Pants Boudoir paid a makeup artist, Sue Smith (a single member LLC) $25,000 for various client shoots during the tax year.
Of that $25,000:
$15,000 was paid via credit card, and $10,000 was paid via check
In this situation, Fancy Pants Boudoir is required to issue a 1099-NEC for just the $10,000 to Sue Smith. The $15,000 paid via credit card would be covered through any potential 1099-K the credit card processor would issue Sue Smith.
Scenario 2
Fancy Pants Boudoir paid Sally Roberts $22,000 for hair styling services for various client shoots for the tax year.
$22,000 was paid via Paypal Business
In this scenario, Fancy Pants is not required to issue a 1099-NEC.
Even though Sally Roberts is NOT guaranteed to receive a 1099-K.
Since these transactions fall under the 1099-K rules, Fancy Pants should not send a 1099-NEC because that could cause duplicate data to be sent to the IRS.
Keep it simple!
Pick one method to pay contractors - and even better, pay them all through a third-party processor, and you won’t have to worry about 1099s ever again. Read this blog to learn more: Pay contractors this way and relieve yourself of 1099 responsibility
Business vs. Personal
This is where it starts to get dicey.
We understand how the 1099-K affects your photography business now, but what about all those personal transactions?
With the Gig Economy and so many entrepreneurs and people with side hustles, we knew this was coming. There are so many avenues to earn income and pay electronically that the IRS wants to be sure everyone is reporting.
This year, 2023, with the new $600 thresholds and no transaction limit, you'll likely end up with a 1099K for business and possible personal transactions.
You can see more than ever why keeping your business and personal accounts separate is even more crucial.
Divide all transactions into three categories.
Divide All transactions into three Categories.
Business
We already covered how business works - all 1099K’s received by your business for business transactions are reportable and taxable.
Personal expenses
If you use Venmo or Paypal to pay a friend back for coffee, send a cash gift to a friend, or make charitable contributions, this is not reportable or taxable. However, you may receive a 1099-K if you hit the limit.
Which was high in 2022, but for 2023, it is $600 or more.
Personal Sales
While selling items online feels personal, it could be taxable. If you sell something for more than you paid, You will be taxed on the profit.
If you sell a couch for $50, chances are you paid much more for it; however, keep a record of what you paid or the value of it and what you sold it for, along with the date.
Again, if you hit the threshold with a third-party payment processor, say you took the payment through PayPal. You'll receive a 1099K and need to report it.
This gets reported on form 1040. Schedule 1
Let's take a look at the IRS instructions for reporting personal 1099K's
The IRS knows
Remember, if you receive a 1099-K, the IRS also receives a copy so they know what was reported, so be sure you report properly.
Once the IRS thinks that you owe additional tax on your unreported 1099 income, they will usually notify you and retroactively charge you penalties and interest
beginning on the first day, they think you owe additional tax
Best Practices - Keep separate accounts and records!
Keep your business and personal accounts separate.
Keep clear records for your business and personal sales.
If you have mixed transactions in one account, print the report and separate it for your peace of mind.
If audited or contacted by the IRS, you will have all your ducks in a row.
Connect With Us
Click here to join my free Facebook Community Financially Focused Photographers
Every week, I go live in this community, answering all your tax, bookkeeping, and tax questions!