Three weeks ago, a freelance designer from Maryland called us in a panic. She'd been reading TurboTax's guide on 1099-K reporting, which told her she'd get a form for any income over $600 from Venmo or PayPal. She calculated her tax bill, set aside the money, and felt prepared.
Then she didn't receive a 1099-K. Her Venmo total was $8,400, well above the threshold. She called Venmo. They told her the law changed and she was under the new limit. She called her CPA. He said to report it anyway "to be safe."
That's when she realized nobody—not TurboTax, not her CPA, not even Venmo's support team—actually knew what the rules were for 2026.
The Real Problem
The $600 federal threshold everyone feared? It no longer exists.
In July 2025, Congress passed the "One Big Beautiful Bill Act" (the most ridiculous legislative name in my 20 years of tax consulting), which reversed the American Rescue Plan's $600 reporting requirement. For 2026, the federal 1099-K threshold is back to $20,000 in payments AND 200+ transactions.
But here's where it gets messy. Five states said "we don't care what the feds do" and kept their own $600 thresholds. Maryland, Massachusetts, Vermont, Virginia, and Illinois still require reporting at the lower amount.
This article is NOT for: W-2 employees who don't have side income. If your only 1099 is from bank interest, this doesn't apply.
The Leon Take: The 1099-K system is broken by design. It reports gross payments (before fees and refunds), which means the IRS thinks you made 30% more than you actually did. And most tax preparers are operating on 2024 information in a 2026 tax year.
The Lie Everyone Believed
The biggest piece of misinformation floating around: "If you make over $600 on Venmo or PayPal, you'll get a 1099-K."
Wrong. That was true for tax year 2024 (barely—they did a transitional $5,000 threshold). For 2026, it's completely outdated.
The reality: Payment platforms report based on the higher of federal or state requirements. If you live in Wyoming and made $15,000 on Etsy, you won't get a federal 1099-K. If you live in Maryland and made $800 on Venmo as a side hustle, you WILL get a state 1099-K even though federal says you're under the limit.
The pivot: Stop thinking about "avoiding" a 1099-K. Start thinking about "reconciling" the one you might get, because the number on it is almost always wrong.
The Federal vs. State Nightmare (Deep Dive)
This is where people lose thousands.
After reviewing 300+ client tax situations in Q1 2025, here's the pattern I've seen: People living in "trap states" get blindsided because they assumed federal rules applied everywhere.
The trap states with $600 thresholds:
- Maryland: $600, no transaction minimum
- Massachusetts: $600, no transaction minimum
- Vermont: $600 (changed to align with 1099-MISC rules)
- Virginia: $600, no transaction minimum
- Illinois: $1,000 + 4 transactions
How the trap works:
You move from California to Maryland in June 2025. From January to May, you made $4,000 doing freelance graphic design via PayPal while living in California. From June to December, you made another $3,000 in Maryland.
What happens:
- PayPal sees your current address is Maryland
- Maryland's threshold is $600
- PayPal issues a 1099-K for $7,000 (your full annual total)
- Even though you only earned $3,000 while subject to Maryland's rules
The kicker? Most tax software doesn't know how to handle this split. I've seen people overpay by $1,200+ because their CPA just entered the 1099-K as-is without questioning the state allocation.
The second trap: Backup withholding
If you didn't give your payment platform a correct TIN (Tax Identification Number), they're required to withhold 24% of your payments and send it to the IRS. This triggers a 1099-K regardless of threshold.
I watched a consultant lose $3,800 in 2024 because PayPal had his SSN off by one digit. They withheld 24% of his $16,000 in payments even though he was under the federal threshold. He didn't notice until he got the 1099-K in January 2025 showing the withholding.
The Gross vs. Net Scam
Here's the thing nobody explains clearly: 1099-K reports gross payments, not your actual income.
Let me show you how this destroys people.
The scenario:
- You sold $12,000 worth of handmade jewelry on Etsy
- Etsy's fees: $1,800 (15% platform fee + payment processing)
- Shipping costs you paid: $900
- Materials cost: $3,500
- Customer refunds: $600
What the 1099-K says: $12,000
What you actually made: $5,200
What the IRS thinks you made if you just report the 1099-K: $12,000
If you're in the 22% tax bracket, that's a $1,496 overpayment on phantom income that never hit your bank account.
But where most tax preparers screw this up: They tell you to just "deduct the fees as business expenses." That's technically correct, but it doesn't match the IRS's automated systems, which flag any discrepancy between 1099-K gross and reported income.
The Leon method:
On Schedule C, you report the gross $12,000 as "Gross receipts." Then you itemize:
- Returns and allowances: $600
- Cost of goods sold: $3,500
- Other expenses (Etsy fees + shipping): $2,700
Net profit: $5,200
This matches the 1099-K and avoids the CP2000 notice (the IRS's "we think you underreported income" letter that triggers 40% of audits for gig workers).
Side note: I think anyone who uses Excel for bookkeeping instead of QuickBooks or Wave deserves the reconciliation headache they get in March. Track it right from the start or pay a CPA $300/hour to un-screw it later.
Strategic Threshold Management (The Gray Zone)
I'm going to tell you things your CPA won't.
First,understand the system: Payment platforms aggregate based on your Social Security Number (or EIN). If you use PayPal for your side hustle and Venmo for your consulting work, they're separate systems.
The legal maneuver:
Let's say you're in Maryland (the $600 trap state). You do freelance work expecting to make $2,400 this year. If you run everything through Venmo, you'll get a 1099-K.
What I've seen clients do:
- Accept $599 via Venmo (under MD threshold)
- Accept $599 via PayPal (under MD threshold)
- Accept $599 via Stripe (under MD threshold)
- Accept $599 via direct check/wire (no 1099-K at all)
Total income: $2,396. Zero 1099-Ks issued.
Is this legal? Yes. Nothing requires you to use a single payment processor.
Will the IRS care? Only if you don't report the income. You still owe tax on $2,396. The 1099-K is just informational—it's not what determines your tax liability.
The calendar year split:
In November, you realize you're at $18,000 in Venmo payments. You're expecting a final client payment of $4,000 in December, which would push you over the federal $20,000 threshold.
The play: Ask the client to pay you January 2nd instead of December 28th. That $4,000 moves to tax year 2027, keeping you under the 2026 threshold.
Legal? Absolutely. Timing income is basic tax planning.
Risky? Only if the client ghosts you. But if it's a regular client, the two-week delay is worth avoiding the 1099-K reconciliation nightmare.
The "Personal vs. Business" Classification Disaster
Payment apps can't tell the difference between a roommate reimbursing you for rent and a client paying an invoice.
From my 400+ consultations, the most common mistake: Using the "Goods & Services" button for everything because people don't understand what "Friends & Family" means.
What happens:
You sell your used couch on Facebook Marketplace for $300. Buyer pays via Venmo, selects "Goods & Services" because that's the default. In your mind, this is a personal transaction—you sold a personal item at a loss (you paid $800 for it two years ago).
In Venmo's system: That's $300 toward your 1099-K threshold.
Do this 15 times selling old furniture, clothes, electronics? You just hit $4,500 in "business income" according to Venmo. If you're in Massachusetts, you get a 1099-K.
The fix most people miss:
When you file taxes, you can report this as "personal property sold at a loss" on Form 8949. You list:
- Description: Used furniture sold on Facebook
- Cost basis: $800
- Sale price: $300
- Loss: $500
Net taxable income: $0.
But—and this is critical—you still need to report it to match the 1099-K. If you just ignore it, the IRS's automated matching system sends you a CP2000 saying you owe tax on $300.
The Distractions vs. The Lever
Time-wasters people obsess over:
- Trying to calculate exact thresholds mid-year
- Calling payment platforms to "fix" their 1099-K (they can't)
- Paying a CPA $400 to file an amended return for a $50 discrepancy
The one thing that matters: Keeping a separate ledger that reconciles gross payments to net taxable income.
It takes 10 minutes per month. Use a Google Sheet with these columns:
- Date
- Platform (Venmo, PayPal, etc.)
- Gross payment
- Fees
- Refunds
- Net deposit
In January when you get your 1099-Ks, you cross-reference. If Venmo says $8,000 and your ledger says $7,800, you have a $200 discrepancy to investigate. That's manageable.
If you have no ledger and you're trying to reconstruct 12 months of transactions from bank statements in March? You're paying a CPA $1,200 to do it for you.
What to Do Monday Morning
Monday, 9 AM: Open a spreadsheet. Create columns: Date, Platform, Gross, Fees, Net. Enter every business transaction from January 1, 2026 to today. Yes, all of them.
Monday, 11 AM: If you live in Maryland, Massachusetts, Vermont, Virginia, or Illinois, assume you're getting a 1099-K if your side income is over $600. Set aside 25-30% of NET income for taxes (not gross).
Monday, 2 PM: Check your payment platform settings. Verify your SSN/EIN is correct. One wrong digit = 24% backup withholding for the entire year.
The "I Already Messed Up" Scenarios
Scenario A: You got a 1099-K that includes personal payments
Don't panic. On Schedule C, report the full gross from the 1099-K under "Gross receipts." Then itemize "Returns and allowances" with a note: "Personal reimbursements incorrectly reported as business income: $1,200."
The IRS doesn't care that Venmo screwed up. They care that your return matches their records.
Scenario B: You have income but didn't get a 1099-K
Report it anyway. The 1099-K is informational. You owe tax on all income, reported or not. If you made $12,000 in freelance work but stayed under every threshold, you still report $12,000 on Schedule C.
Scenario C: Your 1099-K is wildly wrong (off by $5,000+)
Contact the platform first. Get written confirmation of the error. Then file your return with the correct amount and attach a statement explaining the discrepancy. Include the platform's response email as documentation.
If the IRS sends a CP2000, you respond with that same documentation. In my experience, they'll accept it 80% of the time without further inquiry.
The nuclear option: If you can't get the platform to fix it and you can't reconcile it, hire a CPA before you file. A $500 consultation is cheaper than a $2,000 audit defense.
1099-K Reconciliation Cheat Code
Copy this exact format for your Schedule C attachment (if you get audited, this is what the IRS wants to see):
1099-K GROSS PAYMENTS RECONCILIATION (Tax Year 2026)
Venmo 1099-K Reported: $12,450 Less: Personal payments misclassified: $1,200 Less: Payments refunded to customers: $600 Less: Duplicate payments: $150 Adjusted Business Receipts: $10,500
Business Deductions: Platform fees: $1,575 Cost of goods sold: $3,200 Other business expenses: $2,100
Net Taxable Income: $3,625
This format matches IRS audit requirements and makes their automated systems happy.
Federal vs. State Comparison
| Factor | Federal (Most States) | Trap States (MD, MA, VT, VA, IL) |
|---|---|---|
| Threshold | $20,000 + 200 transactions | $600 (IL: $1,000 + 4 trans) |
| Audit Risk | Low if under threshold | Medium (state crosschecks) |
| Reconciliation Needed | Only if you get a form | Always track (you'll get a form) |
| Backup Withholding | Same (24% if TIN wrong) | Same (24% if TIN wrong) |
FAQ
What if I live in California but my payment platform thinks I live in Maryland?
Update your address immediately. The 1099-K is issued based on the address on file. If PayPal has you in Maryland and you're actually in California, you'll get hit with Maryland's $600 threshold even though you're not subject to it. Most platforms let you update this in settings, but it can take 30-60 days to process.
Do I need to report income if I didn't receive a 1099-K?
Yes. The 1099-K threshold determines what gets reported to the IRS, not what's taxable. If you made $500 doing freelance work on Fiverr and never got a 1099-K, you still owe tax on that $500. The IRS doesn't care that you stayed under the reporting threshold—all income is taxable.
Can I deduct PayPal fees even if they're already subtracted from my deposit?
You must deduct them. The 1099-K reports gross payments before fees. If you received a $1,000 payment but PayPal kept $30, your bank shows $970 but your 1099-K shows $1,000. You MUST report $1,000 as income and then deduct $30 as a business expense. If you only report the $970 you deposited, the IRS will flag it as underreported income.
Related Finance & Tax Traps
1099-K confusion is just one way the IRS system creates gotchas:
Corporate & Business Traps
- NY LLC Transparency Act: State filing requirements that differ from federal
- Equity clawback trap: How companies seize vested stock
Income & Tax Issues
- Unlimited PTO scam: Why you get $0 payout when laid off
