Introduction
The IRS 1099-K reporting rule has changed in 2025, affecting small businesses, freelancers, and gig workers who receive payments through third-party platforms like PayPal, Venmo, Square, eBay, and Etsy. With a lower reporting threshold, more businesses will receive Form 1099-K, and failing to report this income can lead to IRS penalties and audits.
This article explains the IRS 1099-K rule, references Internal Revenue Code (IRC) sections, provides real-world examples, and outlines how small businesses can stay compliant.
What Is IRS Form 1099-K?
Under IRC § 6050W, Form 1099-K (Payment Card and Third-Party Network Transactions) is issued by payment processors and online platforms to report payments made to businesses and self-employed individuals.
Key features of Form 1099-K:
- Reports gross payments received through third-party networks.
- Sent by payment processors like PayPal, Venmo, Stripe, Cash App, eBay, and Etsy.
- Used by the IRS to verify reported income on tax returns.
New IRS 1099-K Reporting Threshold for 2025
The IRS has significantly lowered the reporting threshold for third-party payment platforms.
| Tax Year | Previous 1099-K Threshold | New 1099-K Threshold (2025) |
|---|---|---|
| 2024 | $20,000 and 200 transactions | $600 (any number of transactions) |
| 2025 | $600 (no minimum transaction requirement) | $600 (no change) |
Example: Who Will Receive a 1099-K in 2025?
- Sarah, a freelancer, earns $800 from multiple clients via PayPal → PayPal must issue a 1099-K.
- Mike sells $700 worth of handmade items on Etsy → Etsy must issue a 1099-K.
- John receives $550 via Venmo for personal transactions → No 1099-K issued (personal payments are excluded).
What Transactions Are Reported on Form 1099-K?
The 1099-K rule applies to business-related transactions, such as:
- Payments for freelance work, consulting, or gig economy jobs (Uber, Lyft, DoorDash).
- Online sales through platforms like Amazon, eBay, and Etsy.
- Rent payments collected through property management apps.
Transactions NOT included:
- Personal reimbursements from friends or family.
- Payments made via cash, checks, or direct bank transfers.
How the IRS Uses 1099-K for Tax Audits
The IRS cross-checks Form 1099-K with tax returns to identify underreported income. If a business reports less income than the total shown on 1099-K forms, it may trigger:
- IRS audits
- Accuracy-related penalties (IRC § 6662)
- Failure-to-report penalties (IRC § 6721 & § 6722)
Example: Small Business Audit Trigger
Lisa, a small business owner, receives $50,000 in payments via Square, but only reports $40,000 in gross income on Schedule C (Form 1040).
- The IRS flags the discrepancy and may audit her return.
How Small Businesses Should Report 1099-K Income
To stay compliant, business owners should:
- Track all income sources, including cash, checks, and third-party payments.
- Match Form 1099-K totals with business records.
- Report the correct amount on Schedule C (Form 1040) or the appropriate business tax form.
Example: Correctly Reporting 1099-K Income
James, a self-employed photographer, receives:
- $30,000 via PayPal (reported on 1099-K)
- $10,000 in direct bank transfers (not on 1099-K)
- Total business income = $40,000
James must report the full $40,000 on Schedule C, not just the $30,000 from the 1099-K.
Penalties for Failing to Report 1099-K Income
The IRS imposes severe penalties for underreporting income:
| Penalty Type | Reason | Amount |
|---|---|---|
| Failure to file a tax return (IRC § 6651(a)(1)) | Not filing taxes | 5% per month, up to 25% of unpaid tax |
| Failure to report income (IRC § 6662) | Understating taxable income | 20% of underreported tax |
| Tax fraud (IRC § 6663) | Intentional tax evasion | 75% of unpaid tax + criminal charges |
Steps to Ensure IRS 1099-K Compliance
Step 1: Keep Accurate Records
- Track all income sources, not just 1099-K payments.
- Keep invoices, receipts, and bank statements for tax documentation.
Step 2: Separate Personal and Business Transactions
- Use a separate business bank account to avoid IRS confusion.
- Avoid mixing personal and business Venmo or PayPal transactions.
Step 3: Verify Form 1099-K Totals
- Compare 1099-K income with internal records.
- If an error is found, request a corrected 1099-K from the payment processor.
Step 4: File Taxes Accurately
- Report total income on Schedule C (Form 1040) for sole proprietors.
- Business entities file Form 1120 (corporations) or Form 1065 (partnerships).
Conclusion
The IRS 1099-K reporting rule for 2025 requires small businesses and gig workers to report all income accurately. Failure to comply can lead to IRS audits, penalties, and tax fraud investigations.
To ensure compliance and avoid IRS issues, schedule a meeting with Anshul Goyal, CPA EA FCA for expert tax guidance. Book an appointment here:
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant (CPA) in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in IRS compliance, tax litigation, and assisting American businesses and Indian expatriates in managing U.S. tax obligations.
Frequently Asked Questions (FAQs)
1. Who receives a 1099-K in 2025?
Anyone earning over $600 through third-party payment processors (PayPal, Venmo, eBay, Etsy, etc.).
2. Do I need to report income if I don’t get a 1099-K?
Yes. All income must be reported, even if a 1099-K is not issued.
3. What happens if I don’t report 1099-K income?
You may face IRS audits, tax penalties up to 75%, and legal consequences under IRC § 6663.
4. How can I separate personal and business transactions?
Use separate PayPal/Venmo accounts for business and personal transactions.
5. Can I dispute a 1099-K amount?
Yes. If a 1099-K contains errors, contact the payment processor to request a correction.