/ / Is Your Accountant Charging You For Unnecessary 1099-NECs?

Is Your Accountant Charging You For Unnecessary 1099-NECs?

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This is a prequel to an article about receiving Form 1099-NEC 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.

Freelancer small business owner handing over stacks of cash to their accountant for preparing 1099-MISC that weren't necessary

Every year freelancers and solopreneurs face an issue.

It happens each January, without fail.

They have to decide if sending 1099-NEC 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-NEC

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-NEC 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-NEC 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-NEC 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-NEC.

Instead, the processors will be issuing their own tax reporting form, called the 1099-K.

1099 MISC 1099 K rule
Text passage copied directly from page 2 of the 1099-NEC Instructions under the heading “Exemptions” (it still refers to the MISC but applies to the NEC as well)

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-NEC 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-NEC 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.

Others 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-NEC 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.

PERIOD!

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-NEC

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-NEC.

This is regardless of payment method, meaning even if you pay ash to a corporation you don’t send them a 1099-NEC.

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:

1099 MISC S Corporation Rule
(it still refers to the MISC but applies to the NEC as well)

Plain as day, right?

Oh yeah, those exceptions that are mentioned 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.

Why?

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-NEC

Attorneys.

Lawyers.

Whatever term you use, they serve the same purpose for the 1099-NEC.

Payments to attorneys are always reported on a 1099-NEC regardless of business structure.

1099 NEC Attorney Corporations
From the IRS 1099-NEC instructions for ending a 1099-NEC to attorneys even if they are a corporation

You send an attorney a 1099-NEC 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-NEC.

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.

Instead, you should pay yourself, then spend the money.

Yes, it’s confusing.

All you have to remember is:

  • Attorney always = 1099-NEC when paying cash/check–the business structure means nothing in this situation.
  • Attorney never = 1099-NEC when paying with debit/credit/PayPal/similar

PAY ATTENTION TO THIS PART BECAUSE IT IS A LITTLE DIFFERENT THAN OTHER TYPES OF PAYMENTS YOU REPORT ON THIS FORM.

In case you are wondering if you send the 1099-NEC or the old 1099-MISC for attorneys, here is the answer:

1099 NEC Payments To Attorneys
Instructions for from 1099-NEC to file this form for attorney services provided to you in the course of business.

Cash Transfers: You Send A 1099-NEC

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-to be filed.

These are simply “money transfer services” and not actual merchant services account.

Services like:

  • Zelle
  • Venmo
  • Plastiq
  • 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-NEC for all payments made to those who qualify!

Don’t be fooled by services that allow you to fund your account with a credit card, however.

You are still going to be required to file a 1099-NEC 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.

HOWEVER…

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-NEC!

Why?

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-NECs

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 that provides 1099-NEC or the 1099-K on anyone’s behalf on individual accounts.

Clarification: Venmo does have merchant accounts that qualify for the 1099-K but it’s specifically for businesses that submitted tax info.

Most people are using Venmo with their personal accounts to conduct business so you need to check with those people you pay with Venmo, but the overwhelming majority I’ve worked with use personal Venmo accounts and therefore require a 1099-NEC to be sent.

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-NEC to anyone you pay in excess of $600 in a calendar year who is not using a “business” account!

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-NEC.

Frustrating, I know, but that’s what we have to deal with these days?

PayPal Friends & Family

Very quickly:

You should not be sending 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-NEC.

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-NEC 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 the people you run payroll with in the first place.

If you want to get all of this cleared up, the steps are simple:

  1. Ask your accountant why they prepared and charged you for preparing these forms
  2. 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.

Update

I’ve received 2 emails already who have received 1099-NEC 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 a F.A.Q. about reporting requirements for payment processors and it says the same thing that the 1099-NEC instructions state:

Section from IRS 1099-K instructions telling you how to report money that can be reported on 1099-MISC

So, no matter what you reference, the answer is simple:

ANYTHING REPORTED ON A 1099-K DOES NOT GET REPORTED ON A 1099-MISC!!

Your Turn

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!

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Emmy
4 years ago

I have been freelancing for a few years and paid by Paypal. I’ve always received a 1099-Misc from the person or company, and the IRS has never given me any problems about it or asked for any reports, so I’m a little confused by this. I pay someone to do my taxes, and she’s never said there is a problem with getting a 1099-Misc.

Shayna
5 months ago
Reply to  Eric J. Nisall

Great article! I tried to read carefully but am still stuck on one point. As a vendor, how can you know whether your contractor met both qualifications from PayPal of receiving BOTH $20K+ AND 200+ transactions in the business year and will therefor be issued a 1099-k, therefor not needing a 1099-NEC from us?
I am in a similar boat as Emmy from 4 years ago. My company (wordpress development) have a PayPal business but have never met both the qualifications to receive a 1099-K.
We have some clients who send us 1099s and some who don’t (but maybe should as we are an LLC partnership?)
I am not worried about this for 2020 as again we did not meet both the income and transaction # thresholds. HOWEVER, we do have a couple contractors who are paid through paypal. 
So, how do you know if you need to send a 1099-NEC to a contractor who you pay via Paypal (or similar, like Venmo)? Do you have to ask them if they meet those qualifications to receive a 1099K from paypal? THANK YOU!!!

Wendy
Wendy
3 years ago

HI Eric,

I found this article very interesting and helpful. I do have a question. I pay most of the contractors who work for me via PayPal and Venmo. How do I know if they will be receiving a 1099-K from these entities?

Thanks!
Wendy

Gavin
Gavin
1 year ago
Reply to  Eric J. Nisall

What if you are using Venmo to send gifts to friends or just helping them out because then need gas money. Do I have to send 1099-misc for that? I am not paying for a service or contractor.

Karla Haas
Karla Haas
3 years ago

This is a great article and I plan to share the 1099K information with my bookkeeping clients. I am careful not to send 1099-Misc to Corporations and anyone paid via a Credit Card or PayPal. I find that a W9 request will sort out anyone I might be unclear about. Can you confirm that electronic payments bank-to-bank or via a Debit Card still need to have 1099-Misc’s issued? The bank and credit unions are not issue 1099-K. Do I have that right?

Chris
Chris
3 years ago
Reply to  Eric J. Nisall

This is great information. My wife paid an independent contractor using Venmo; BUT the payment method used for Venmo was the Visa debit card. Given that Venmo is sitting between Visa and the contractor, I assume this means that Visa will not be able to send a 1099 to the contractor — meaning my wife should send the contractor a 1099-MISC. Thoughts?

Thanks!

Chris

Matt
Matt
3 years ago
Reply to  Eric J. Nisall

Thanks for the information. Just to make sure I am understanding what you are telling Chris… If I have a business and I use the debit card linked to my business bank account to pay a non-corporation independent contractor $1,000 through Venmo, I would issue that contractor a 1099-Misc. But if I use the same debit card to pay the contractor through PayPal or Square, then I would not issue the 1099-Misc because PayPal and Square are credit card processors. Do I have this right? Also, is it safe to assume that most people that accept debit cards associated with a bank account are using a credit card processor and you would therefore not be required to send a 1099-Misc?

KL
KL
3 years ago

One thing to note from what I understand, there are many consultants/vendors/subcontractors that are paid Paypal for example but if they don’t meet the 1099k min threshold reporting requirements to receive the 1099k, which is a different threshold amount from the 1099misc req($600), they may not actually receive a 1099k.

1099k min threshold reporting:
Form 1099-K is sent out to payees by a payment settlement entity if there are more than 200 such transactions and the gross payments exceed $20,000

This leaves many consultants/vendors/sole proprietors who do not keep accurate records (Grrrrrrrrrr!!!!) of their business activities & have normally relied on 1099 forms as a way to track their previous year income for tax return prep. Then they come crying to the payee for a record of payments they received the prior year & most usually at the 12th hour in a panic since they never kept records of their inv’s. As a courtesy we end up providing the pymnt report, but it is pretty annoying to partially do someone else’s bookkeeping for free. Very common. Not everybody, but it does happen quite a bit. 🙂 🙂

KL
KL
3 years ago
Reply to  Eric J. Nisall

You got that right!!!! 🙂 LOLLL Have a great day!

Tabby
Tabby
3 years ago

I have a question how do I file my daughter’s 1099 Miscellaneous Income? She worked for an assisted living facility and they didn’t take out taxes. She received a 1099 Miscellaneous income form. On the tax site in using it keeps telling me I have to claim it as my business, but she don’t own a business it’s how they did it. So I’m lost on how to file this can you please help?

Matt
Matt
3 years ago

Pay Pal owns Venmo and yet one is not reported under 1099-misc and the other (venmo) does. On your return is Venmo income considered ‘cash’ or ‘checks’ or ‘venmo’ or ‘digital transfer income’ when you’re listing types of income and amounts?

Michel M.
Michel M.
3 years ago

What about when I pay someone through Venmo and I elect for Venmo to charge my credit card? Versus debiting money directly from my bank account? The credit card charge comes through as “Venmo” and no contractor’s name is listed on the transaction. Is no 1099-MISC required in this case?

Cliff
Cliff
3 years ago
Reply to  Eric J. Nisall

So I don’t understand, if you read the regulation 1.6041-1(a)(1)(iv) and 1.6050-1(c) and the statute 6050W , it seems that Venmo and Zelle meet the defintions of a 6050W entity under the statute.

Zelle requires you to sign up with a debit card and only accepts members with debit cards and seems to. Venmo actually funds an account, charges your credit card etc.

It seems the test of whether these payments qualify for the exception should be whether the entities meet the definitions under the statute and regulations and not whether or not they actually send out a 1099.

I’m curious why these organizations (Zelle and Venmo) feel they fail the tests and rules set forth in the code and regulations, and how as a practitioner you can figure out what qualifies as a 6050W organization and what does not. It’s not like Zelle and Venmo tell you on their websites.

Cliff
Cliff
3 years ago
Reply to  Eric J. Nisall

Apparently Zelle requires a debit card for enrollment only if you wish to send or receive money and your bank isn’t a member of their network.

Anyways, thanks to your comment on ACH I located an example.

In regulation 1.6050W-1 Example 3, “There are no contractual agreements between A and the sellers for the purpose of permitting the sellers to use the ACH network. ” and then it reasons therefore this is not a third party payment network.

My conclusion is that for whatever reason, Paypal has contractual agreements permitting sellers to use their network, but Venmo and Zelle do not?

Example 4 describes a company that processes checks through ACH, but I think that is obviously different, because they are a check processor.

Blake Treu
2 years ago

What makes PayPal complicated for me is that they are many things to many people. Depending on how you use PayPal, it can be a payment processor, and they issue Form 1099-Ks for individuals/businesses meeting the applicable thresholds. However, PayPal also was originally and still is used as a transfer service.

PayPal does not figure in so-called “personal payments” (i.e. transfers) when determining whether they will issue a Form 1099-K. Therefore, payments made through PayPal in the form of a personal payment are really synonymous with payments through Venmo or Zelle and a 1099-MISC should be filed for such payments…

Unless: we distinguish PayPal on the grounds that they are wearing both hats and monitor personal payments to identify ones that should instead be business payments and therefore eligible for 1099-K reporting. In that case, we really can say that all payments through PayPal, regardless of the type, are exempt from 1099-MISC reporting.

Lisa Peters
Lisa Peters
2 years ago

I have a question about contractors paid via credit card or Paypal with less than 200 transactions and less than $20,000 in payments. If third party processors only report payments on a 1099-K that are over $20,000 for the year, am I responsible for filing a 1099-Misc to all my subcontractors who received more than $600 but less than $20,000 even when all the payments were made via credit card?

Naomi
Naomi
2 years ago
Reply to  Eric J. Nisall

Hi Eric, this is a great article yet you contradict yourself numerous times with regard to PayPal. In the above you state -“If you pay the contractor via a PSE (payment settlement entity) such as PayPal or merchant account, then you have absolutely zero obligation for filing any tax forms.” However, in other comments you’ve stated that the PayPal “Friend/Family” payments would require a 1099-misc form be issued. If someone was to pay an independent contractor through PayPal using the “Friend/Family” payment option does PayPal still count that money towards the $20,000 threshold and potentially issue the 1009-k? I’ve read conflicting reports on this. I’m sure their algorithms can differentiate between payments for Friends/Family vs. Goods & Services but no one can direct me to this policy in PayPal’s TOS. Whilst I know sending payments to independent contractors for services using the Friend/Family function is against PayPal’s guidelines many people do it to avoid fees.

Naomi
Naomi
2 years ago
Reply to  Eric J. Nisall

Thank you for taking the time to respond Eric and for the link. Much appreciated!

Suzanne
Suzanne
2 years ago

I’m a freelance accountant trying to finish up 1099 processing for several clients. The issue I’m having is determining how payments were made (now, after the fact). Most of my clients use QBO for their bookkeeping and every bank has a different way of listing payment info in the memo section of transactions. Sometimes the word “DEBIT” will be spelled out, but often it’s really vague and I can’t tell if the payment was done via ACH or through a 3rd party like QB invoicing. Anyone have any feedback on this?

Bryan
Bryan
2 years ago

Ok, I’ve read the whole article, and comments. Very helpful. Now I’m going to really make your brain hurt. What about the scenario where I use STRIPE (a card processor), but I’m using their ACH payments feature, not credit card. Does that change reporting requirements? I know the 1099-K threshold is $20,000/200 payments per year. Fair to say that the method used to make the payment is irrelevant since STRIPE is a TSPO?

Joe
Joe
2 years ago
Reply to  Eric J. Nisall

Hi Eric, I know you’ve specifically mentioned Zelle and Venmo in regards to requiring a 1099-MISC. What about those of us using Cash app to make payments? I’m assuming it will also require a 1099-MISC, but it does process payments from my credit/debit card.

Thanks

Joe
Joe
2 years ago
Reply to  Eric J. Nisall

Hi Eric, thanks for the link and info. I did some research prior to asking you but the confusion was with me using a credit card to fund. Also, the accounts are personal and not business, so your explanation makes perfect sense.

I’m sure the info within this thread will come to use for many in the future. Especially now that you’ve updated it with the keywords applying to “payment apps.”

Thanks again

Lynn
Lynn
2 years ago

If a NGB pays expenses on behalf of others, my understanding is that the 1099 Misc is issued to the payees, not the people they are paying the expenses for. Is this correct?

Lynn
Lynn
2 years ago
Reply to  Eric J. Nisall

I was referring to a non-govt body (sports related) that is a 501(c)(3). They grant funds to athletes to help pay for training. The funds never go directly to the athletes, but are instead paid directly to coaches, etc on behalf of the athlete. (The athlete submits the bill to them and the club pays it directly to the vendor).

Nick
Nick
2 years ago

Hi Eric,

What about if you pay contractors on Venmo via Credit Card — not a linked bank account or Venmo cash balance.

I thought I had to send 1099-misc to 2 contractors, but when filing on QuickBooks, this alert came up:
“Excluded payments: If you made any payments to contractors by credit card, debit card, gift card, or a third-party network like PayPal, the IRS requires you to exclude those amounts from your 1099-MISC forms. Instead, they require the payment settlement companies to report those amounts.”

I appreciate the help.

Thanks,

Nick

Nick
Nick
2 years ago
Reply to  Eric J. Nisall

Thanks Eric! Much appreciated.

Rick Miller
2 years ago

Eric, this was very well written and dove into each nuance in this topic. Great information!

Gavin
Gavin
1 year ago

Finally, I did pay one contractor 500 dollars via Venmo.

Then I paid 300 dollars to a completely different contractor via Venmo.

For each contractor I did not pass 600 dollars. As a result, I don’t have to send 1099-misc?

Is this correct?

Gavin
Gavin
1 year ago

Finally, what if I don’t know my contractor’s information that I paid via Venmo?

Am I screwed?

Gavin
Gavin
1 year ago
Reply to  Eric J. Nisall

Thank you for your quick reply! You have been very informative.

However, I also use Venmo to help out my family. Sometimes my cousin might need gas money or food etc.

So if through out the calendar year my cost of helping him out is 600 dollars. Do I have to 1099 him?

Note, I am not hiring for a service just helping a family member.

A smith
A smith
1 year ago
Reply to  Eric J. Nisall

This might be a silly question, but if you’ve had friends pay you for freelance work, and they pay through PayPal or Zelle, will the IRS even know if you don’t report?

A smith
A smith
1 year ago
Reply to  Eric J. Nisall

Got it! Thanks! One last question: if you loan your friends money, and they pay you back with interest, is that claimed as MISC income or interest on taxes?

Thanks!!

Yehoshua s Leibowitz

Hello, ERIC J. NISALL.
Firstly thanks for sharing this knowledgeable post with us.
Yes, I agree with you most of the Accountant Charging you for unnecessary 1099-MISCS.

Sean Seevers
Sean Seevers
1 year ago

Eric I’m a practicing CPA in Florida, and your article is very interesting to say the least.

Have you thought about how the taxpayer might substantiate payments made to independent contractors if say for example their schedule C was examined.? I’ve seen multiple examinations where payments to subcontractors were disallowed as expenses as the taxpayer did not issue a 1099 miscellaneous for amounts paid to contractors for personal services.

I cannot imagine that an examining agent would accept your reasoning for not filing a 1099-MISC, if he asked the taxpayer to substantiate amounts paid to individuals for personal services. I’m not saying you are wrong in your interpretation of these very twisted rules, I happen to agree with you. I just don’t see agents on examinations accepting that as an answer.

DWAYNE A FOSTER
DWAYNE A FOSTER
1 year ago

Good read. What about flipping 1 house for the year, do I need to use a 1099 k?

Carla Bjork
Carla Bjork
1 year ago

The gray area that we can’t seem to find concrete answers on is electronic debits to pay vendors from bank accounts. In Quickbooks, if you mark it “debit,” it doesn’t tend to fill the 1099..If you leave it blank (as in no check #), it adds it to the 1099. Is there a direct answer as to whether ACH transfers go on a 1099? Thanks

Carla Bjork
Carla Bjork
1 year ago
Reply to  Eric J. Nisall

Thanks. These are direct transfers from our clients’ bank to the vendor, so reading that again, it would seem, that they do need to be issued by our client. Thanks for your help.

Christy
Christy
1 year ago
Reply to  Eric J. Nisall

So, this includes wire transfers?

Adam S
Adam S
1 year ago

HI Eric,

Very helpful article. I have 2 questions:

-are the rules the same for Form 1099-NEC ? (seems like starting from this year Form 1099-NEC should be used for individual contractors instead of 1099-MISC)

-if i paid individual contractor $1000 through paypal (which is higher than $600) i should not issue him anything, right ? (even though theoretically it’s possible that this individual contractor will not meet yearly paypal threshold which will result in him not getting 1099-K from paypal)

Ann Rek
Ann Rek
1 year ago

Hi Eric, thank you for the article. I just want to confirm that 1099-Misc shouldn’t be issued to attorneys if payments were made with a credit card. Thank you!

Ann Rek
Ann Rek
1 year ago
Reply to  Eric J. Nisall

Thank you so much!

Kelly Nowokunski
Kelly Nowokunski
1 year ago
Reply to  Eric J. Nisall

Eric, this is a great article and really helpful. Do you have a link with more guidance on the requirement to send the 1099-MISC to an attorney even if they were paid with a credit card. In my searches all the information I find states that if payments were made by credit card you don’t need to also send a 1099-MISC but nothing mentions attorneys specifically. My company pays attorneys with both checks and credit cards so I would like to have links to support reporting the credit card payments to them on the 1099-MISC. Thank you!

Suchi B
Suchi B
1 year ago

Your article has been very helpful in providing the clarity about the 1099-MISC requirements. Can you tell me what happens if a business owner uses his personal credit card to pay the contractor for a business service? Do those payments get reported on 1099-MISC or will the contractor get a 1099-K for that?I know he shouldn’t be doing it, but they do what they do. Thanks.

Suchi B
Suchi B
1 year ago
Reply to  Eric J. Nisall

ok, great! Thank you for clarifying.

Marcy Walsh
Marcy Walsh
1 year ago

I have a client who sometimes pays vendors with cash/check and sometimes uses a credit card or PayPal. They are not consistent with one type of payment per vendor. My question is, what if they paid a vendor $500 by check and $500 through PayPal? Neither us reportable by itself but the total is. Did this vendor just make tax-free money?

Jo Ellen Peters
1 year ago

Loved reading this article, found it looking for info on whether I needed to file a 1099-Misc on behalf of my client for payments they made to a sub-contractor through Zelle. I import the bank transactions into QB desktop and Zelle is not in the description. I had to actually look at the bank statement to see how the payment was made. Your article answered my question, so I will send the 1099-Misc.

But, reading the entire article reminded me of a couple of instances last year where I disagreed with the CPA of one of my clients who insisted that I send a 1099-Misc to all sub-contractors regardless of how they were paid. I ended up sending her a link to the requirements and did not send the 1099-Misc to sub-contractors paid by credit cards. I was somewhat surprised that she didn’t know this rule.

The other issue was another client who had a sub-contractor wanting to know why she didn’t get a 1099-Misc because she had received more than $600 from my client. The sub-contractor was paid through PayPal and it was explained to her that she would not receive anything because she was below the $20,000 threshold. The sub-contractor did not understand, she didn’t know how she could file her taxes without a 1099 (I know, strange huh?), and was just relentless in harassing my client. I ended up typing up something stating what my client had paid her just to get her to stop harassing my client.

Wonder what I will run up against this year? Happy tax season!

nagendra R
nagendra R
1 year ago
Reply to  Eric J. Nisall

Good morning Eric,

Why we are not filing1099 MISC to bank and payroll provider??

Jay Esguerra
Jay Esguerra
1 year ago

I am one year into this entrepreneur lifestyle with my LLC with two other members as my partners. I have a few general questions. If I write a check to a person I worked with who isnt the partner, that was above $600. Do I need to get a 1099 form from that person? What if I paid through zelle and it was above $600, do I need a 1099 or a W2 from that person and do I need to get an invoice as well? Lets say the job was done on December 29th, 2019 but paid January 2020. Which year of the form are they suppose to use, 2019 or 2020?

Jay Esguerra
Jay Esguerra
1 year ago
Reply to  Eric J. Nisall

Got acouple more questions. So how about if my partners take out money from the business or we just withdraw money from the bank acct totaling more than $600. Is there any forms we specifically need? Or any forms for sending money through zelle to our personal bank acct as our payout.

Also lets say my business takes in investors. They write a check either above $9999 or less than $10,000. For a return, lets say 10%. They get their investment back plus the 10%. My business writes them a check back. Would this require a 1099 misc form as well?

Winter
Winter
1 year ago

I would love some clarification on payments through PayPal. I paid contractors through PayPal but using the friends and family function. Do I need to send them a 1099?

Mary
Mary
1 year ago

Hi Eric,

Your article was very helpful. However, I’m wondering if TransferWise is the same with Zelle and Venmo where there are no 1099-k reporting on their end. Hope you can give your insight regarding TransferWise. Thank you!

Mary
Mary
1 year ago
Reply to  Eric J. Nisall

Hi Eric, thanks for your reply. I was able to check with their support yesterday via email and said that, “…If you transfer money with us you should disclose and pay any required taxes related to the transfer – but we cannot tell you whether tax applies to your transfer…”.
But as I mentioned in my reply about their US entity, they double-checked it with their finance team and said that they do issue 1099-K 🙂

Mary
Mary
1 year ago
Reply to  Eric J. Nisall

Hi. Someone might rely on my reply before that transferwise do issue 1099-k. However, I’ve got a precise answer and it seems that they do not issue 1099-k. Here is the reply from their support:

“1099-k should be issued by PSE, like you mentioned. A PSE is either a merchant-acquiring entity (in the payment card context) or a third-party settlement organization (in the third-party network context). It does not appear that TransferWise meets the definition of a Payment Settlement Entity (either as a merchant-acquiring entity or a third-party settlement organization) required to file Form 1099-K. Firstly, TransferWise is not a bank or other organization that has the contractual obligation to make payments to merchants or businesses in settlement of payment card transactions. TransferWise is not in a business of settling payment card transactions with businesses that accept payment cards as a payment method. Money transfers to or from TransferWise accounts are not related to settlements of payment card transactions. Moreover, TransferWise does not issue any payment cards. Secondly, TransferWise does not qualify as a third-party settlement organization that provides a third-party payment network to enable fund transfers between purchasers and providers of goods and services. Although it is possible that some TransferWise clients established accounts with TransferWise to settle payments between each other as buyers and sellers, TransferWise does not provide standards and mechanisms for settling such transactions and does not guarantee payments to providers of goods and services. Overall, we believe TransferWise should not be considered as having established a third-party payment network.”

Teri
Teri
1 year ago

Thank you, Eric. This is very informative and well written. I am keeping Quickbooks for someone and they started using VENMO to pay resources this year. They thought this would be treated like PAYPAL and no 1099 would be required. Now I am letting them know that’s incorrect. The VENMO payments are recorded on the CREDIT CARD and them VENMO is paying the resource so on the CREDIT CARD it just says VENMO. I guess I will need a report of all transactions paid via VENMO and the transaction must list the payee and the amount. Then I will have to sum via each PAYEE and determine if a 1099 MISC is required or not and reach out for that resources W9 info. Does that sound correct?

Jennie
Jennie
1 year ago

Hi Eric,

Great article. First, thank you for answering the question about whether or not to issue 1099-MISC for ACH payments made to vendors/independent contractors through third party payment processors. I had a vendor/independent contractor I paid with an ACH from my business checking account above the $600 threshold for reporting and they required payment through Honeybook. I spent time trying to figure out if Honeybook was similar to PayPal or Venmo or what – then after searching their site saw they issue 1099-K forms to account holders meeting the 200 transaction, $20,000 threshold. So now I won’t issue a 1099-MISC for the vendor/independent contractor.

I do have another question – all other vendor/independent contractor payments I’ve made throughout the year have been through ACH from my business checking account. Early in the year I used Quickbooks Payroll to facilitate the payments to my vendors/independent contractors and later in the year I used WellsFargo Direct Pay. My understanding is neither of these services report on 1099-K or any other tax forms, so it’s my responsibility to prepare 1099-MISC for my vendors/independent contractors paid in this way above the $600 threshold, correct?

Also, I’ve made payments throughout the year to attorneys using debit and credit cards. If I used a debit card linked to my business checking account to make any of these payments and it exceeded the $600 threshold, I must also issue a 1099-MISC, correct?

I appreciate your guidance on how improper it is for accountant’s to issue 1099’s to all vendors/independent contractors without much care for the IRS rules – this is precisely my current situation with my accountant – that’s why I’m trying to go it alone.

Appreciate any additional clarification you can lend.

Jennie
Jennie
1 year ago
Reply to  Eric J. Nisall

Thanks so much, Eric! Appreciate you clearing everything up for me.

K. Davis
K. Davis
1 year ago

Great article! Currently arguing with my CPA about this. I asked him to issue TWO 1099’s to independent contractors (as we always do) and he issued two additional ones for two LLC (s corp) companies. When I asked him why, he said their rule of thumb is, if they don’t see “inc” after the company name, then it gets issued. I guess my ultimate question is, if we are the client, and instruct/ask for two specific things, and they do whatever the hell the want – who has the ultimate say? Us as the business owners, or the CPA to handle things how they see fit? OF course i will be charged for them as well.

Michelle
Michelle
1 year ago

Hi Eric,

Great read, very informative, Thank you! Question…I offer outsourced accounting services to a number of clients. I invoice my clients using QuickBooks Online Invoices. My invoices are emailed to my clients, and have the option to electronically pay the invoice directly from the email via bank transfer, debit card, or credit card. Most of my clients pay via bank transfer, and these ACH transfers are included in my monthly merchant service reports.

Based on my understanding of your article, since the ACH payments I receive are processed by QuickBooks Merchant Services, those ACH payments should be excluded from 1099-MISC reporting. Is that correct?

I just had a lengthy chat with someone from the QB merchant support department, and was told that QB issued 1099-K forms will only include credit and debit card transactions. I quoted this section of your article to this agent:

“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!
Why?
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).”

The agent told me the quoted information is correct. Which is a contradiction of what he first told me. I pointed this out, and asked which department I should contact for further clarification. He again told me that QB will only report credit/debit card transactions and that I must issue 1099-MISC for ACH payments processed by Intuit.

Have I misunderstood something? Do you have any additional information on QuickBooks Online Payments?

Thank you,
Michelle

Joice
Joice
1 year ago

Great article. Thanks. I am in a situation where I have received a payment of $905 as travel reimbursement for a training program offered by a company. Now they sent me a 1099-MISC with this amount as Non Employee compensation. Is this considered a compensation? I have actually paid the amount out of my pocket and they returned it? Shall I accept 1099-MISC. Thank you so much.

Joice
Joice
1 year ago
Reply to  Eric J. Nisall

No it is not my employer. I have no working relationship with that company. There was an agreement signed which is for privacy of the information. No work related agreements. They have put the amount on box number 7 in 1099.

Sue warwick
Sue warwick
1 year ago

Only an idiot accountant would waste their time on unnecessary 1099 work. We do it as a service to our clients, and usually lose money on them. The time it takes to hunt down the information – eg, “Mike’s auto repair” – is he an individual, a corporation, an LLC? And if an LLC, does he operate as a partnership or Corp? And get their proper EIN or ssn and not a UBI or contractors number… We hate 1099s!

jimmy
jimmy
1 year ago

If a friend/family member sends me a couple hunder dollars through cashapp multiple times (not for business) do i have to report that? Or is the $600 a total number and not for individual payments?

Ken
Ken
1 year ago

Eric,

This has been the most helpful information on 1099-misc I’ve been able to find; thank you!

One question I can’t seem to gain clarity on is regarding the sale of a property I flipped. At closing I paid a substantial amount to close on the property (realtor commissions, closing costs, etc.). As I understand it, all money at a closing is funneled thru the title company and out to the various participants. The title company is an LLC being taxed as an S-Corp.The title company issues a 1099-S to the IRS but I’m not clear on the following:

Do I need to send 1099 MISC to the realtors, etc. or is this the responsibility of the title company?

Because the title company is taxed as an S-corp, am I correct in assuming I do not need to send them a 1099-MISC?

Thanks in advance for sharing your insights!

Ken

Ken
Ken
1 year ago
Reply to  Eric J. Nisall

Thank you Eric!

Greg Stone
Greg Stone
1 year ago

You are awesome! Such helpful and clear information. I first read your post a couple years ago, and I returned to it today because I find myself in a “grey area”. I’m hoping you can help. I borrowed a bunch of money last year in connection with the renovation of a commercial building. The bank that lent me the money directly disbursed the funds to contractors. In other words, I approved the vendor invoices, sent them to the bank, and then they wired payment (or sometimes issued bank drafts) to the contractors. In such a situation, who is responsible for issuing the 1099-MISC? It was technically my money going out as payment, but my name wasn’t on the check/wire. I’m grateful for any advice you can offer.

Susan
Susan
1 year ago

Eric,
Would I need to file a 1099 Misc for 2019 for receiving a total amount of $1900 for one year from a part time employer from Zelle for services rendered? Would this fall under the rule you had mentioned earlier about “filing 1099 Misc for any amount received over $600 but under $20,000”?
Thank You for your assistance Eric.

Kerry Tracy
Kerry Tracy
9 months ago

Now that they are changing it to the 1099-NEC, do the same rules apply? Specifically, I want to know if I should avoid filing the NEC if I paid people using PayPal. Thanks!

Kerry Tracy
Kerry Tracy
8 months ago
Reply to  Eric J. Nisall

Thank you!

Larry Call
Larry Call
6 months ago

My son makes money online from various sources (Epic Games, Youtube, Support Creator) and pays a couple others more than $600 who have assisted him in performing services. He has a PayPal PERSONAL account that he uses and he selects “Paying for an Item or Services” when sending money to them. Does he have to file 1099NEC forms in this situation? It sounds like PayPal would do this on his behalf, but thought I would ask since it’s a personal PayPal account.  THANK YOU.  This article was really helpful.

Larry Call
Larry Call
6 months ago
Reply to  Eric J. Nisall

Thank you Eric!

Tatiana
Tatiana
6 months ago

Dear Eric,
Do I understand correctly that now (Jan 2021) Venmo is considered a payment processor and does issue 1099-K forms through their owner PayPal but only for the business accounts?
https://help.venmo.com/hc/en-us/articles/360044347033-Business-Profiles-Tax-FAQ
Please advise and thank you in advance.

Tatiana
Tatiana
6 months ago
Reply to  Eric J. Nisall

Thank you for your prompt reply, Eric! 

Brittany
Brittany
5 months ago

Thank you for this article! It is helping a lot right now.  One question:  You said payments to attorneys will always go on the 1099-MISC, however, I’m reading that proceeds from a settlement would go on the 1099-MISC, but regular attorney fees should be reported on the 1099-NEC. Which is correct?
p.s. I was going to read through the comments to see if this question was answered, but I’m at work and can’t go through them all.

Merry
Merry
5 months ago

Shouldn’t payment to attorney use form 1099-MISC box 10 instead of 1099-NEC?
Thank you!

Keith
Keith
5 months ago

Hello Eric,
I *think* I have read all of the comments and responses but I have an issue that I do not believe has been addressed. What happens if I pay Vendor ABC $300 through Stripe and $300 by check?
Will Stripe issue 1099-K forms for $300? What do I do about the $300 check payment? Is it wrong to combine both payments into one $600 1099-NEC form? Thanks!

Keith
Keith
5 months ago
Reply to  Eric J. Nisall

Hi Eric, So is there indeed a loophole? If I pay someone $300 via check, $300 via Paypal, and $300 via Stripe, then I am not responsible for creating any 1099s? Will the IRS not consider that I have paid this vendor $900 in total? Thanks!