WHAT THE 1099-K EXPANSION CHANGES IN YOUR WORKFLOW THIS SEASON

This tax season, Form 1099-K takes center stage as reporting thresholds drop drastically, capturing millions more transactions than ever before. The IRS’s expansion means that third-party payment networks such as PayPal, Venmo, Square, Cash App, and eBay must now issue Form 1099-K for gross payments exceeding $600 annually, regardless of the number of transactions. Small CPA firms are feeling the impact as more clients—especially self-employed individuals and side gig earners—arrive with new 1099-Ks that were not part of prior-year filings.

For preparers, this influx significantly changes the workload and review process. Each form must now be verified, reconciled, and categorized correctly to ensure gross income isn’t overreported on Schedule C, Form 1065, or Form 1120-S. The timing pressure increases because many payment platforms issue corrected statements late in the season, and client education remains uneven.

To adapt, CPAs must implement earlier intake, tighter reconciliation protocols, and consistent documentation tracking. Firms that redesign digital workpaper templates can save substantial review time by preventing restatements or CP2000 mismatch notices. The 1099-K expansion transforms reconciliation from a small task into a core compliance process requiring automation and consistent communication with clients to maintain efficiency and accuracy.

STOP DOUBLE-COUNTING GROSS RECEIPTS: RECONCILE 1099-K TOTALS TO SCHEDULE C, 1065, AND 1120-S

A major risk under the expanded Form 1099-K rules is double-counting gross receipts from different revenue sources. Payments through Square or PayPal may already appear in bank deposit records. If those same transactions are also recorded manually or automatically through accounting software, income on Schedule C or business returns can be overstated by thousands of dollars.

To avoid this, firms should follow a three-step reconciliation workflow:

• Aggregate total 1099-K amounts across all platforms for each taxpayer identification number (TIN).

• Tie those totals to the appropriate tax return—Schedule C for sole proprietors, Form 1065 for partnerships, and Form 1120-S for S corporations—ensuring they align with gross receipts before deductions.

• Offset duplicate inclusion by separating merchant processing deposits from non-1099-K deposits such as checks or direct bank transfers.

Some 1099-K forms also include sales tax, refunds, or platform credits in their totals, which can inflate income. Creating a digital reconciliation worksheet in Excel, Google Sheets, or structured workpaper software helps trace every dollar from 1099-K reporting to the income statement. Explicitly tying out and documenting variances establishes audit-ready substantiation while preventing overstatement and IRS CP2000 notices.

BUILD A MERCHANT CLEARING PROCESS IN QBO/XERO TO MATCH NET BANK DEPOSITS TO 1099-K GROSS

For firms managing both bookkeeping and tax, merchant clearing accounts in QuickBooks Online or Xero have become essential. Because Form 1099-K reports gross payments before platform fees, refunds, chargebacks, or sales tax, your client’s bank deposits will almost never equal the 1099-K totals. This discrepancy can confuse clients and reviewers during tax preparation.

To resolve this, create a “Merchant Clearing – [Platform Name]” account. Record each sale at the full gross amount, then deduct platform fees, refunds, and chargebacks separately. When bank deposits are posted, clear them against the merchant clearing account. By year-end, the account should net to zero if all entries are recorded.

This approach ensures reported income ties directly to 1099-K gross while maintaining transparency into actual cash flow. It also simplifies reconciliation summaries and standardizes workflows across clients. Firms that adopt consistent merchant clearing processes reduce manual reconciliations, ease staff training, and minimize mismatched totals during filing season. Automating this workflow through the accounting system or structured routines further reduces prep time and review errors.

FIX CLIENT INTAKE NOW: SEPARATE PERSONAL AND BUSINESS APPS, UPDATE TINS, AND DOCUMENT PLATFORMS

Client intake is an often-overlooked bottleneck in 1099-K compliance. Many small-business clients use personal payment apps such as Venmo or Cash App for both personal and business activity. When those apps issue 1099-Ks under the client’s Social Security Number rather than their business EIN, personal transactions may be misclassified as taxable income.

To prevent this, intake forms should capture:

• All payment platforms used to receive funds (Square, Stripe, eBay, Etsy, etc.).

• The TIN and account type used for each platform.

• Whether the account is personal or business.

Encourage clients to separate activity by setting up dedicated business profiles linked to business bank accounts and EINs. Maintain a list of each client’s merchant platforms within your CRM or workflow system so missing 1099-Ks can be flagged early. This audit trail supports documentation in case of IRS or state-level inquiries and saves review time. Smart intake practices reduce mismatches and improve filing accuracy across your client base.

HANDLE PERSONAL-ITEM 1099-KS CORRECTLY: REPORT-TO-ZERO WITHOUT TRIGGERING IRS MISMATCH LETTERS

Many taxpayers are now receiving 1099-Ks for non-business transactions such as selling personal items, splitting food bills, or reimbursing friends. Although these are not taxable events, ignoring the forms can still trigger IRS discrepancy notices.

The proper approach is to report the 1099-K amount but net it to zero. For individuals, include the full amount as “Other Income,” then subtract the same amount on the next line with an explanatory note such as “Non-taxable personal reimbursement from Form 1099-K.” This ensures IRS matching systems recognize the reported income as non-taxable.

CPA firms should train staff to identify these personal 1099-Ks early and develop internal templates that determine whether a form relates to business, mixed, or personal activity. Supporting documentation such as screenshots or transaction logs should be maintained in digital workpapers. A standardized “personal 1099-K tracker” helps maintain review consistency and provides the firm with protection during post-filing correspondence.

ACCOUNT FOR FEES, SALES TAX, TIPS, REFUNDS, AND CHARGEBACKS SO INCOME ISN’T OVERSTATED

Form 1099-K totals include gross receipts before expenses. If your firm fails to account for fees, taxes, and adjustments, taxable income can be overstated.

When reconciling, break down 1099-K totals into these categories:

• Platform processing fees

• Sales tax collected and remitted

• Tips paid or distributed

• Refunds, returns, and chargebacks

Each category should be recorded in the appropriate expense or liability account. For instance, sales tax collected should offset a “Sales Tax Payable” account, while platform fees are deductible business expenses.

If platform reports don’t provide detailed breakdowns, request end-of-year summaries comparing gross and net payouts. Automating data imports into workpaper templates can reduce manual reconciliations. These adjustments ensure that returns reflect true net income and provide documentation if the IRS questions reported gross receipts.

SET A YEAR-ROUND 1099-K PLAYBOOK: MONTHLY TIE-OUTS, WORKPAPER TEMPLATES, AND CLIENT TRAINING

The 1099-K expansion requires firms to maintain a year-round process rather than a one-time adjustment. A well-defined playbook keeps teams ahead of potential mismatches and prevents last-minute reconciliation issues.

A comprehensive playbook should include:

• Monthly tie-outs of merchant platform data to accounting records

• Standardized workpapers mapping gross receipts, fees, and reconciled deposits

• Client training materials promoting separated accounts and accurate tracking of gross versus net payments

Integrating bookkeeping and tax teams under one reconciliation standard ensures that income statements align with expected 1099-K totals before filing season. Automation tools that standardize report imports and workpaper structures further strengthen consistency and efficiency. With a unified approach, firms can manage the new 1099-K environment proactively rather than reactively.

TIME FILINGS AROUND STATE RULES AND CORRECTED 1099-KS TO AVOID NOTICES AND AMENDED RETURNS

Each state has unique 1099-K filing thresholds and deadlines, adding complexity for multi-state clients. Some states follow the federal $600 limit, while others retain higher thresholds. Understanding these differences ensures timely and accurate compliance.

Corrected 1099-Ks complicate the filing timeline further. Payment platforms often reissue corrected forms in February or March, during peak tax season. Filing before these corrected forms arrive can result in amended returns. Adopting a firmwide policy to postpone such filings until mid-March avoids unnecessary rework.

Firms should maintain practice management flags for clients expecting corrected 1099-Ks or multiple merchant statements. Communicate clearly with clients about any strategic delays in filing. Additionally, monitor state-level matching programs, as some states actively compare federal and state 1099-K submissions. Coordinated timing reduces mismatched totals, CP2000s, and unnecessary correspondence.