TerpTax: Understanding Form 1099-K

By Samuel Handwerger, CPA, Faculty Advisor for TerpTax

This tax-filing advice series installment focuses on a tax reporting form that might show up in your inbox if you've been selling stuff online or getting paid through apps like Venmo, PayPal or Cash App. It's Form 1099-K. Receiving it indicates you have a tax return reporting requirement. And understanding it now could save you a lot of headaches when filing your taxes.

What the heck is a Form 1099-K anyway?

A Form 1099-K is basically the IRS's way of tracking money that flows through payment apps and online marketplaces. If you received payments through these platforms, you might get this form reporting how much money came your way. Think of it like this: When you use a payment app or sell on platforms like eBay or Etsy, those companies are required to tell the IRS about it. The Form 1099-K is their receipt saying, “Hey, this person received X amount of dollars through our service.”

Why did I get this form?

• You sold items online through marketplaces like eBay, Etsy, or Facebook Marketplace
• You got paid for gig work through apps (like driving for Uber, delivering for DoorDash)
• You received money through payment apps like Venmo or Cash App for goods or services
• You rented out your apartment on Airbnb

The important thing to understand is that not all the money reported on this form is necessarily taxable income, but you had better tell that to the IRS via your tax return. Let’s take a look.

Breaking down what's actually taxable

If you sold personal items, did you clean out your dorm room and sell your old textbooks, gaming console, or clothes you never wear?  Here's what you need to know:

Sold at a loss. If you sold something for less than you paid for it (like most used textbooks!), you don't owe taxes on that money. You had a loss, but unfortunately, you can't deduct that loss either. You'll need to report the sales price and the original cost proving the loss, but make sure the loss doesn’t reduce your other taxable income. Have the tax software "zero it out" so you don't get taxed. But also, don’t report the loss…since it was for personal items.

Sold at a gain. If you somehow sold something for more than you paid (maybe that limited edition sneaker collection finally paid off), then yes, you do owe taxes on the profit—the difference between what you paid and what you sold it for. I won’t give you the stats on how many people honestly report these gains, but if you don’t report the sales price on your return, and if it is substantial, you will get to have a future conversation about it with the IRS when they send you a letter of inquiry.

If you provided services or sold goods as a business. Maybe you're doing some side hustle like graphic design, tutoring or selling crafts you make. In this case, the gross amount on your 1099-K is your starting point…  You can deduct business expenses from this amount.

What are business expenses? You might like the way I teach this in class…it is the “BUT(T) FOR” rule. These are expenses that you would not have made “but for” the fact that you were trying to make money with this gig. Things like advertising, shipping costs, refunds, and materials can be subtracted.

For example, if you're selling handmade jewelry on Etsy and your 1099-K shows $3,000, but you spent $1,000 on materials and paid $300 in platform fees, your actual taxable income would be $1,700. And that’s how you want to report this on your return…using the schedule for running a personal business, the famous Schedule C.

What about money from friends or what if the information is wrong? This is super important for college students. If your roommate Venmo'd you for their half of the pizza last night, or your friend paid you back for concert tickets, that's NOT supposed to be on your 1099-K. These are personal payments, not income.

If these kinds of transactions are showing up, or incorrect items and amounts, on your 1099-K, you should:

• Contact the issuer immediately (their info is in the top left corner of the form).
• Ask for a corrected form.
• Keep copies of everything—the original form and all communications.
• Don't wait to file your taxes—proceed even if you haven't received the corrected form yet. Report the amount you are shown as having received and show the same amount as a deduction on that Schedule C, explaining the details of why you are deducting it. For example: Say, personal loan repayment, not income.

Importantly, report the full amount of the 1099-K on your return and then calculate how much is taxable, if any. This way the IRS can match the payment to your return. That can solve a lot of future headaches.

The big takeaway for college students is good record keeping is your best friend. Keep track of:

• Original purchase receipts for items you sell
• Business expenses if you're running a side hustle
• Which payments were personal (like roommate reimbursements) vs. for goods or services

This will make your life so much easier when it's time to file taxes and could save you from paying taxes on money that isn't actually taxable income.

One more thing, and put a spoiler alert right here, even if you don't receive a Form 1099-K, you're still required to report all the income you receive from selling goods or services. The IRS doesn't play around with this stuff and getting it right now will save you potential audits or penalties later.

After all, you may have heard me say somewhere in the halls of the business school…always report all your income, then show how much, if anything, is taxable and why.

Samuel Handwerger is a full-time lecturer in the accounting and information assurance department at the University of Maryland’s Robert H. Smith School of Business. He serves as faculty advisor to TerpTax, a nonprofit organization affiliated with UMD that provides free tax preparation services for low to mid-income individuals in the University of Maryland, College Park community, according to VITA/TCE guidelines.