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.
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.
You should NEVER give a 1099-MISC to anyone you pay via credit card or PayPal.Click To Tweet
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 you ways going forward.
In this case, the change is in how to report payments to independent contractors.
It used to be that small businesses (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 it required of it.
Remember…you aren’t the tax police!
Freelancers hate when companies file a 1099-MISC when they shouldn't. And they're right to!Click To Tweet
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 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?
Your accountant is supposed to try to save you money, not make you spend it unnecessarily!Click To Tweet
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 an accountant or payroll company 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 is 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.
Update: 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/
You know what’s funny (or sad? or stupid?) about this response?
The link they provided is a 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!