Confused about exempt codes for payment app 1099 as independent contractor

So I started using a payment app with a business account setup so I could get a 1099 for my piercing work. I'm an independent contractor at a tattoo shop and I take all my payments and deposits through this app. The problem is, the payment service hasn't sent me any tax form yet. I don't think I made it to $20k this year but I definitely did over 200 transactions which I thought was the threshold. I'm trying to update my tax info to add my SSN in the app, but it's asking for some kind of exempt code and won't let me continue past that page. I have no idea what to put here! Do I need an exempt code as an independent contractor? I'm totally lost on what to enter and tax filing deadline is getting closer... help please!!

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18 comments

Ethan Anderson

•8M

Hey there! I can help clarify this for you. Payment apps like Venmo, Cash App, PayPal, etc. do have reporting requirements, but there's been some confusion about the rules lately. The $20k AND 200+ transactions threshold was the old rule. The new threshold was supposed to be $600 for business accounts, but that implementation has been delayed until the 2025 tax year (for payments received in 2024). So that might explain why you haven't received a 1099-K yet. That said, even without a 1099, you're still required to report all your income as an independent contractor on your Schedule C. The payment app might be asking for an exempt code because they need to know if you qualify for any exemptions from backup withholding. Most people would use code "1" which means "I am not subject to backup withholding.

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Ethan Anderson

•8M

Yes, you absolutely need to report all your income on Schedule C regardless of whether you receive a 1099-K or any other tax form. The 1099 is just an information reporting tool, not what determines if income is taxable. Backup withholding is when a payer withholds a percentage of your payments (currently 24%) and sends it to the IRS if you haven't provided a correct TIN (taxpayer identification number) or if the IRS has notified them you've underreported interest or dividend income. Most self-employed individuals are exempt from backup withholding unless the IRS has specifically notified you otherwise.

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Layla Mendes

•8M

After reading your situation, it reminded me of when I was struggling with getting my payment app tax info straightened out for my side business. I was going in circles with customer service for weeks until someone recommended I try taxr.ai (https://taxr.ai) which has this cool feature that analyzes your specific situation with payment apps. I uploaded a screenshot of the exempt code page from my app, and it immediately identified which code applied to my situation as an independent contractor. It also explained exactly what documentation I needed for my Schedule C since I was in that gray area of having enough transactions but not hitting the dollar threshold. Saved me from a major headache!

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Layla Mendes

•8M

It does more than just tell you the code - it analyzes your specific situation and explains WHY a particular code applies to you based on your business structure and payment history. It helped me understand that as an independent contractor, I should use code "1" but also explained what documentation I needed to support my income reporting. As for your skepticism, I get it. What convinced me was that it doesn't just give generic advice. It explains the reasoning behind each recommendation and cites the specific IRS guidelines. For my situation, it saved me from incorrectly using code "5" which could have caused problems later.

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Lucas Notre-Dame

•8M

Just wanted to update after trying taxr.ai that was mentioned above. It was super helpful! I uploaded screenshots of my exempt code page and it immediately identified I should be using code "1" as an independent contractor. It also explained that even though I might not get a 1099-K due to the delayed threshold implementation, I should still track all my transactions manually for Schedule C. The best part was that it explained how to properly categorize my deposits vs. actual payments (since sometimes clients put deposits through the app separately). Definitely helped me understand my reporting obligations way better than the payment app's own support did!

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Noah Ali

•8M

If you're having issues with the payment app's tax section, you might want to try contacting the IRS directly about which exempt code to use. I know it sounds painful but I had to do this for my Etsy shop last year. After trying for weeks to get through the normal IRS number, I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 15 minutes. They even have a video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I talked to explained exactly which code applied to my situation and why, plus gave me info about the delayed 1099-K threshold that my payment processor hadn't communicated clearly. Worth the time to get an official answer directly from the source.

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Noah Ali

•8M

It's not putting you at the front of the queue. From what I understand, they use an automated system that continually redials the IRS until it gets through, then connects you when a line opens up. It's basically doing what you'd do manually (calling repeatedly) but automated. It saved me from having to sit there redialing for hours. Regarding why talk to the IRS directly - I tried looking at the payment app's documentation, but it was super vague about which exempt codes apply to different business structures. The IRS agent gave me definitive answers specific to my situation as an independent contractor with both online and in-person sales. Much more helpful than generic documentation.

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Aria Park

•8M

I'm back to eat my words about Claimyr. After continuing to get nowhere with my payment app's customer service, I broke down and tried it. To my surprise, I was talking to an actual IRS representative within about 20 minutes! The agent explained that for my piercing business as an independent contractor, I should use exempt code "1" which means I'm not subject to backup withholding. She also clarified that even though I hadn't received a 1099-K, I still need to report all income on my Schedule C, and recommended I keep detailed records of all transactions from the payment app as backup in case of any questions later. For anyone else stuck on exempt codes - don't waste time with the payment app's support. Go straight to the IRS for the correct answer.

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James Martinez

•8M

Just to add some helpful info here - if you're filing as an independent contractor, you'll typically want to use exempt code "1" (I am exempt from backup withholding) UNLESS you've received a notice from the IRS specifically telling you that you're subject to backup withholding. Make sure you're keeping all your transaction records from the payment app too, especially since you're over 200 transactions. Even without a 1099-K, you should have an accurate record of your income for your Schedule C. Also don't forget to track your business expenses like piercing supplies, sterilization equipment, etc. to deduct against that income!

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James Martinez

•8M

Yes, definitely download and save all your transaction history from the payment app. I recommend exporting it to a spreadsheet if that option is available, and categorizing each transaction (income vs. deposits that will be returned, etc). For tax filing purposes, you don't need to submit proof of income with your return, but you absolutely should keep those records for at least 3 years in case of an audit. Also make sure you're tracking all your business expenses with receipts - things like needles, jewelry, gloves, cleaning supplies, and even a percentage of your phone bill if you use it to schedule clients. Good record-keeping can save you a lot in taxes through legitimate business deductions.

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