Picture a salon owner who looks at her Form 1099-K and sees a number bigger than her bank deposits. Then an IRS letter arrives saying she underreported income by the difference. Often the explanation is simple: the 1099-K reports gross payments, and her books recorded what actually hit the bank after the processor took its cut.
Simple to explain is not the same as already explained. Here is how 1099-K reporting works and how to make your return match it.
Who files a 1099-K, and on what
IRC 6050W requires payment settlement entities to file information returns on payments made in settlement of reportable payment transactions. Notice 2025-62 explains that section 6050W covers two kinds of transactions:
- Payment card transactions. All payments in settlement of payment card transactions must be reported. There is no minimum.
- Third party network transactions. Payments by a third party settlement organization, such as a payment app or online marketplace, must be reported only if the gross amount of payments to the payee exceeds $20,000 and the number of transactions exceeds 200.
That third-party threshold has a history. Notice 2025-62 explains that the American Rescue Plan Act of 2021 had lowered the threshold to $600, and that Public Law 119-21 in 2025 retroactively restored the $20,000 and 200-transaction test, as if it had been included in the 2021 law. If you heard about $600 Forms 1099-K from payment apps, that rule is gone.
The return reports the gross amount of the reportable payment transactions. Gross is the key word. The Instructions for Form 1099-K (revised 12/2026) define the box 1a gross amount as the total dollar amount without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, shipping amounts or any other amounts.
Why the 1099-K never matches your deposits
A business that books its card sales from bank deposits will almost always show less than the 1099-K, because the processor reports before it subtracts anything. Common differences:
- Processing fees taken out before the deposit.
- Refunds and chargebacks processed after the sale.
- Tips paid by card and passed through to staff. Restaurant and salon card volume includes them.
- Timing: sales on December 31 that settle in January.
- Multiple processors or accounts, so one 1099-K covers only part of the business, or one EIN receives forms for two locations.
- Personal payments run through a business app account, such as reimbursements from friends, which are not sales but may be counted in gross payments.
None of these items means income was underreported. Each needs to be shown.
Reporting it correctly on the return
The cleanest approach is to report gross receipts that include the full 1099-K amounts and then deduct the differences where they belong: processing fees as an expense, refunds and returns as returns and allowances, and tips paid out to employees through payroll where applicable. Your gross receipts line will then be at least as large as the 1099-K total, and the IRS's matching will not flag it.
The alternative, reporting net deposits as gross receipts, is not necessarily wrong in total, but it creates a mismatch that you will have to explain later.
Card volume is also only part of a cash business's revenue. If gross receipts on the return are close to the 1099-K total, an examiner will ask where the cash sales went. See our guide to restaurant sales audits and our guide to bank deposit audits.
How the IRS matches
For business returns, the IRS's Business Underreporter program, described in IRM 4.119.4, matches information returns submitted by payers against corporate and fiduciary returns, and sends Letter 2030 or Letter 2531 when there is a potential discrepancy. The IRM's analysis sections include payment card and third party network payments as their own category, and address situations where both a Form 1099-K and a Form 1099-MISC or 1099-NEC report the same amounts.
That last point matters. A customer who pays you through a payment app may also send you a Form 1099-NEC for the same payment. The same dollars can be reported twice. You report the income once and keep the documents that show the overlap.
Wrong TIN, wrong business
A 1099-K is issued to the taxpayer identification number on the payment account. If you opened a processor account under your SSN and later formed an LLC or corporation, the 1099-K may still go to your SSN. Or a single account may serve two businesses. Update the account to the correct TIN with a Form W-9 and keep records that show which business earned which receipts.
Payments in settlement of payment card and third party network transactions are reportable payments for backup withholding purposes under IRC 3406(b)(3). For third party network payments, section 3406(b)(8) treats them as reportable for backup withholding only when the year's transactions exceed the 6050W threshold, unless payments to the same payee were reportable in the preceding year. A TIN problem on a processor account can lead to withholding from your settlements at the rate the IRS currently states as 24 percent. Fix TIN mismatches fast.
Tips on 1099-K starting with 2025
The 2025 tax law added a new wrinkle. Public Law 119-21 amended section 6050W so that, for tax years beginning after 2024, a third party settlement organization must separately report the portion of payments reasonably designated by payors as cash tips and the occupation of the recipient. Notice 2025-62 gave penalty relief for 2025 to TPSOs that did not separately report those amounts. For salons, barbers and other tipped trades paid through apps, this reporting is tied to the new tip deduction; see our guide to salons and barbershops.
When a letter arrives anyway
If the IRS says your return underreports 1099-K income, do not simply agree and pay the difference. Compare the letter's figures to your reconciliation. If gross receipts already included the 1099-K amounts and the fees and refunds were deducted elsewhere on the return, say so, show the page and line, and attach the processor statements. If the business actually left card income off the return, fix it, and consider whether the same gap exists in other years before the IRS asks about them.
Industry notes
- Restaurants. Card tips flow through your processor and into the 1099-K gross amount, then out to servers through payroll. Your reconciliation should show them leaving as well as arriving. See our restaurant audit guide.
- Contractors. A customer who pays through an app may also issue a Form 1099-NEC. Track both so the same job is not counted twice.
- Medical and dental practices. Patient card payments appear on Forms 1099-K while insurer payments appear on Forms 1099-MISC. Reconcile each to its own revenue stream.
- Online sales. The August 29, 2025 revision of IRM 4.10.4 incorporated guidance making completion of the e-commerce and internet use income probe mandatory. If you sell online, expect the examiner to ask about it.
A year-end routine
- Collect every Form 1099-K for every account and TIN.
- Pull the processor's monthly statements and tie gross volume to the 1099-K.
- Build a reconciliation: 1099-K gross, less fees, refunds, chargebacks and tips paid out, equals card deposits.
- Make sure total gross receipts on the return equal or exceed the total 1099-K amounts.
- Keep the reconciliation with the return. If a letter comes, it is your answer.
If an underreporting letter has already arrived, answer it by the deadline; the firm's IRS audit page explains how it approaches these cases.
The 1099-K is the processor's version of your sales. Make sure your return tells the same story, with the fees and refunds shown, not assumed.