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As a non-U.S. resident operating an online business through a U.S LLC and receiving payments via platforms like PayPal or Stripe, you might have encountered the Form 1099-K from one of these third-party payment processors like PayPal.
In this video, I’ll explain what this form signifies for you, and address common concerns.
Understanding Form 1099-K
Form 1099-K is an informational tax document that payment settlement entities, such as PayPal and Stripe, issue to report certain payment transactions to the Internal Revenue Service (IRS). This form details the gross amount of all reportable payment transactions within a calendar year. (irs.gov)
Why Did You Receive a 1099-K?
2021 Requirements
In 2021, payment processors like PayPal, Stripe, and Venmo were required to issue a Form 1099-K if:
- Your total transactions exceeded $20,000 AND
- You had more than 200 transactions in the calendar year
This threshold meant that many small businesses and freelancers did not receive a 1099-K unless they had significant volume.
Current Requirements (2024 & Beyond)
But no, the IRS lowered the threshold starting in 2023 (although implementation was delayed). The current reporting requirement is:
- More than $600 in total transactions, regardless of the number of transactions.
This dramatic reduction means that far more people — including small business owners, freelancers, and even casual sellers — may receive a 1099-K, even if they only had a few transactions.
Does Receiving a 1099-K Mean You Owe U.S. Taxes?
Receiving a Form 1099-K does not automatically imply that you owe U.S. taxes. This form is primarily for reporting purposes. However, it’s crucial to determine whether your income is considered “effectively connected income” (ECI) with a U.S. trade or business. If your LLC’s activities in the U.S. are substantial and continuous, the income might be classified as ECI, making it subject to U.S. taxation. Conversely, if your business operations are entirely outside the U.S., and you have no U.S. source income, you might not owe U.S. taxes. It’s essential to consult with a tax professional to assess your specific situation.
What Should You Do with the 1099-K Sent by PayPal or Stripe?
Upon receiving the Form 1099-K:
- Review the Information: Ensure that the details on the form, such as your Tax Identification Number (TIN), business name, and the reported amounts, are accurate.
- For Filing Form 5472: All foreign-owned U.S. LLCs are required to file Form 5472 with the IRS annually. The 1099-K can help ensure you accurately report your transactions, avoiding both under-reporting and over-reporting, which could possibly land you in trouble or cause your LLC to not be in good standing with the IRS.
Keep in mind that PayPal and other payment processors send a copy of your 1099-K to the IRS — meaning they already have your transaction records on file. If your Form 5472 doesn’t match what they received, it could raise red flags with the IRS.
So, Using your 1099-K as a reference for your Form 5472 filings ensures that the IRS sees a consistent record, reinforcing your legitimacy and helping you avoid penalties.
The IRS introduced the 1099-K to reduce under-reporting and increase tax compliance among freelancers, online sellers, and business owners who aren’t traditionally under the government’s radar. Since independent businesses and online entrepreneurs were difficult to track, many had the opportunity to misreport or even hide their income. By requiring third-party payment processors (like PayPal, Stripe, and others) to report transactions, the IRS now has more insight into business earnings and can identify cases of under-reporting.
However, for non-U.S. LLC owners, the impact of the 1099-K is minimal, as foreign-owned LLCs typically don’t owe U.S. taxes. Instead, the 1099-K mainly serves as a reporting tool, ensuring the IRS has a clear record of transactions. While U.S. business owners must be cautious about tax obligations, foreign-owned LLCs primarily use the 1099-K for accurate reporting, rather than for tax liability purposes.
In our next video, I’ll guide you through the process of filing Form 5472 using the information from your 1099-K.
