This is a prequel to an article about receiving Form 1099-MISC when you aren’t supposed to and how it can cause headaches when the IRS comes looking for money you never really earned but was misreported on your behalf. This is the flip-side for those of you who are the ones on the sending side.
Also, for reference, a new old form is coming in 2020 called the 1099-NEC. For all intents and purposes, this is the form for paying independent contractors and freelancers going forward. The rules for the 1099-NEC are the same as for the 1099-MISC so they can be used interchangeably for the purposes of this particular discussion.
Every year freelancers and solopreneurs face an issue.
It happens each January, without fail.
They have to decide if sending 1099-MISC forms are necessary.
In some cases it is.
In others, it definitely isn’t.
But there’s a catch these days.
What it basically comes down to is being charged for a service that isn’t necessary.
And by not necessary, I don’t mean “not something you have to do but helpful”.
No, I mean they may be charging you for something you shouldn’t be doing at all.
Something you shouldn’t be doing under any circumstances.
On top of that, they may be doing damage to your reputation.
Or at the very least making people not want to work with you.
As an accountant myself, I’ve heard plenty of stories about it happening.
And the problem which stems from the issue of whether or not to file these forms is:
Being charged to file 1099-MISC forms that shouldn’t be filed AT ALL.
Rules For Filing A 1099-MISC
Some of you may know the rules about working with independent contractors and freelancers.
Some of you might not.
In short, when you work with people who are not employees, you need to report any yearly amounts paid in excess of $600.
That’s the basic rule.
You are required to file a 1099-MISC with the IRS and issue a copy to the contractor.
You’re required to send this information to the individuals and the IRS by January 31st (or the next business day if it falls on a weekend).
There are others–like you don’t issue a 1099-MISC to corporations for regular services.
But those really don’t have any bearing on this particular discussion.
Then there are the penalties if you mess up.
If you don’t file, fail to send the individuals their statements, or misrepresent the information you can face penalties based on the number of forms and how late they are filed.
Things have changed, however, when it comes to who you need to report payments to…
Why Your Accountant Shouldn’t Be Doing This Work
Many people find change difficult to accept.
It’s even worse when you’ve been doing something one way for what seems like forever only to be told that you have to change your ways going forward.
In this case, the change is in how to report payments to independent contractors.
It used to be that a small business (or any business for that matter) would have to file a 1099-MISC for anyone regardless of the payment type.
Of course, for most of that time, there wasn’t PayPal and only the largest of businesses could afford to accept payments via credit cards directly.
Back in 2011, the IRS changed the way that credit card and third-party payment processor transactions would be reported.
No longer will these types of payments be reported by the individual businesses on form 1099-MISC.
Instead, the processors will be issuing their own tax reporting form, called the 1099-K.
Why is this important?
(This is the aforementioned catch from the opening section!)
Because this change meant big savings for small businesses which stopped using cash (or checks) to pay their contractors.
They would no longer have to pay for the preparation and filing of 1099-MISC forms because it was no longer their responsibility.
But again, change is hard, and many accountants either couldn’t adapt to comply with the new rule or they outright ignored it.
This is where you’re paying for unnecessary work.
If you are paying all of your bills strictly by credit card or, say PayPal, you should UNDER NO CIRCUMSTANCES be issuing a 1099-MISC to any of the freelancers you hire.
Unfortunately, there are many reports of companies still doing exactly that.
They may simply not have told you what the rules were to begin with, preying on your trust.
Some may even be using scare tactics–using the fines previously discussed–to scare you into paying them for a service they don’t belong doing.
Other still may simply (wrongly) believe that they are still doing things the “right way” since it’s what has always been done.
There are people even using a rationale similar to this:
We’re filing the 1099-MISC just in case because we can’t be sure the contractor will get a 1099-K”.
Regardless of the manner or reason, you shouldn’t be paying for this service if you paid someone via credit card, PayPal, or any other 3rd party processor that collects tax info for the purpose of issuing a 1099-K.
You aren’t responsible for what your contractors do…you are only responsible to make sure your company does what is required of it.
Remember…you aren’t the tax police!
Corporations (Almost) Never Get A 1099-MISC
In the”Rules” section above I mentioned corporations.
This is because under most circumstances, corporations, whether C or S, are exempt from being issued a 1099-MISC.
This is regardless of payment method, meaning even if you pay ash to a corporation you don’t send them a 1099.
It also applies to other business structures electing to be taxed as a corporation (ie: the Single-Member LLC that files for S-Corporation tax treatment).
Don’t believe me?
Is your accountant telling you otherwise?
Have a look for yourself:
Plain as day, right?
Oh yeah, those exceptions that are mentioned, those are pretty rare, although there is one very common one which we will get to in the very next section.
Trust me, I’ve had bosses who insisted on sending 1099s to everyone on behalf of clients–even corporations–and I would have to practically yell and shove the instructions in their face to make them relent.
Because it was wrong to both do the work that wasn’t required and especially to charge the clients for it!
Sending Attorneys A 1099-MISC
Whatever term you use, they serve the same purpose for the 1099-MISC.
Payments to attorneys are always reported on a 1099-MISC regardless of business structure.
You send a attorney a 1099-MISC unless you paid them with a credit/debit card or PayPal-type service.
Business payments that is.
If you are paying for your attorney’s guidance and expertise on personal matters, then you don’t send a 1099-MISC.
What if you happened to pay for those personal services through your business?
Change your accounting for it from “Legal Fees” or “Legal & Professional” or whatever you named the category to “Distributions” or “Draw”.
You shouldn’t be paying for personal expenses with business money anyway.
Yes, it’s confusing.
All you have to remember is:
- Attorney always = 1099-MISC when paying cash/check–the business structure means nothing in this situation.
- Attorney never = 1099-MISC when paying with debit/credit/PayPal/similar
PAY ATTENTION TO THIS PART:
For attorneys, you will only be filing form 1099-MISC.
This is the one deviation on the rules for the 1099-NEC.
Regular freelancers and independent contractors will move to the 1099-NEC when it arrives, but attorneys will stay on the 1099-MISC!
Cash Transfers: You Send A 1099-MISC
With the rise in the number of cash-transfer services it’s important to take note that none of these systems count as “3rd party processors”.
That means all transactions done using these platforms require a 1099-MISC to be filed.
These are simply “money transfer services” and not actual merchant services.
- even bank Bill Pay
There is a huge difference in that money transfer services are supposed to be for personal use, where merchant services are for business payments.
If you aren’t giving your tax info to a system, then it is not going to send your partners a 1099-K, which in turn means you must complete a 1099-MISC for all payments made to those who qualify!
Don’t be fooled by services which allow you to fund your account with a credit card, however.
You are still going to be required to file a 1099-MISC for anyone you pay using that method because the transfer service still isn’t a 1099-K provider.
They send the money from their own account and recoup it plus a fee by charging your card so you really aren’t paying those people via credit card.
ACH transactions sent using actual 3rd party payment processors such as PayPal, Stripe, or other merchant services systems are exempt from reporting on a 1099-MISC!
Because even though those payments are being sent from your bank account to your contractor’s bank account, it is being done so via the same clearinghouse system that the credit and debit card transactions are done with.
This means all of the transactions are reported on the 1099-K that the processor files on your partners’ behalf (if they qualify).
Special Word On Transfer Apps & 1099-MISC’s
Venmo recently added the ability to use a credit card as a funding source.
Don’t let this confuse you…it doesn’t exempt you from filing a form 1099-MISCs for contractors to whom you send Venmo payments funded from a credit card.
Venmo itself is not a service which provides 1099-MISC or the 1099-K on anyone’s behalf on individual accounts.
Neither is Cash App.
Even if you use a credit card to transfer money, all you are doing is funding your own account with cash from the card.
Then the cash is transferred to the recipient’s account.
This means that as long as you use these apps to send money, regardless of the source of the funds, you are still responsible to send the 1099-MISC to anyone you pay in excess of $600 in a calendar year!.
The same holds true for any of the other services which let you fund an account with a credit card but send the cash to the other person’s bank account.
It’s a very confusing issue because none of these companies make giving clear guidelines a priority on their sites.
Some, like Square’s Cash App don’t even have a way for someone like me–a non-user accountant seeking clarification–to access support (you have to have an account or do an end-around and contact square first!)
The problem arising from this is that businesses are allowed to operate on these systems so…
You will need to ask anyone you send money to if they have a business or personal account!
Then based on that info, you will know whether or not to send a 1099-MISC.
Frustrating, I know, but that’s what we have to deal with these days ?
PayPal Friends & Family
You should not be sending a contractor payments via PayPal’s Friends & Family option.
That is specifically designed to send–you guessed it!–friends and family money.
Money to reimburse them for your half of dinner.
Or a gift you both went in on together.
PayPal doesn’t recognize these payments as reportable on the 1099-K so if you pay a contractor with this option, you will have to send them a 1099-MISC.
And the contractor may even have their account closed for misusing the system or at the very least be told they have to convert it to a business account.
This Is Also Pissing Off Your Partners
Remember how I said that the credit card or payment processor is responsible for reporting the 1099-K these days?
If you are still filing a 1099-MISC on your partner contractors’ behalves, then you reporting duplicate income.
When you report duplicate income, the IRS looks at their income tax returns and sees only part of that being reported.
Then, the IRS goes to your partners looking for the rest of the income that was reported under their tax ID, even though there isn’t any.
What that does is create headaches for your partners because they now have to spend time putting together reports showing that the money you reported is the same as what was reported by the processor and that their tax returns weren’t filed incorrectly.
This leads to lots of wasted time that could’ve been spent making money.
Or, if they have to pay their accountant to do the work, then you are costing them in unnecessary spending.
And that my friends pisses people off!
Do you really want to make life harder for people you have to work closely with and whom you rely on to do so many tasks for your business?
Get Your Accounting Straight
Look, I know that you may not have a clue about payroll tax rules or even what the hell a 1099-of-any-kind is.
But isn’t that why you pay a tax accountant or payroll processor in the first place.
If you want to get all of this cleared up, the steps are simple:
- Ask your accountant why they prepared and charged you for preparing these forms
- If they can’t come up with a clearly defined and reasonable answer, fire them and hire an accountant that knows WTF they’re doing.
See, 2 steps are all it takes.
Oh, and please send your apologies to your contractors and let them know that you were not behind it and that you’re sorry they had to go through it.
You may also want to look into a malpractice suit against your old/current accountant since the instructions are crystal clear on this mess.
I’ve received 2 emails already who have received 1099-MISC forms when they shouldn’t have and one of the people tried contacting the business which sent it. This is the response:
You use the Bluehost 1099-misc on your tax return and the paypal 1099-k is just for reference. You do not put the 1099-k on your tax return. https://www.irs.gov/uac/general-faqs-on-new-payment-card-reporting-requirements
You know what’s funny (or sad? or stupid?) about this response?
The link they provided is an F.A.Q. about reporting requirements for payment processors and it says the same thing that the 1099-MISC instructions state:
So, no matter what you reference, the answer is simple:
ANYTHING REPORTED ON A 1099-K DOES NOT GET REPORTED ON A 1099-MISC!!
If you happen to have fallen into this trap, leave a comment and let everyone know if you questioned your accountant/payroll processor about it and what their response was! And if you are on the receiving end of this debacle of a situation, tell us all too!