What To Do When You Wrongly Receive A 1099-NEC
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This is a follow-up to my previous article about sending Form 1099-NEC when they aren’t required and how it can be costing you money and give your partners unnecessary work. This is the flip-side for those of you who are the ones on the receiving end.
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 and the IRS still uses the “MISC” in many of its instructions.
One second you’re walking to the mailbox, not a care in the world.
The next second, you’re filled with dread.
You hold a letter from the IRS, your hand trembling.
Scared as you may be, you open it, hoping it’s not what you think.
Experienced freelancers will know some of this already.
If you are relatively new to freelancing, this may be totally new.
In either case, you’ll want to pay attention.
I can guarantee that if you haven’t personally, you know someone who has dealt with it.
And because I’m going to put your mind at ease about it.
So what is “it” already?
DOUBLE INCOME REPORTING.
And it can be a pain in the ass, not to mention scary as shit if you aren’t prepared.
Tax Forms You Need To Know About
I like to be thorough and not take anyone’s level of knowledge for granted, so bear with me for a second while I explain this to anyone who isn’t very familiar with the concept.
Hell, you self-taught experts may surprise yourselves with how much you didn’t know so you may want to read this all the way through too!
As a business owner/contractor, you aren’t treated the same as an employee.
You don’t get a regular paycheck with taxes taken out.
You don’t get a neat little W-2 at the beginning of the year summarizing your earnings and tax withholding in a single, neat document.
Instead, you are responsible for calculating and paying your own estimated taxes, getting a form 1099-NEC instead (if you earn $600 or more from any single partner for the year and paid via cash, check, bank transfer, or money-sharing app).
This can be loosely described as the non-employee version of a W-2, except it only shows income (no tax info since you do that independently of the people you work for).
You probably don’t even get a check or direct deposit at all.
Most likely you accept credit cards in your business.
Or get paid via a 3rd party payment processor such as PayPal.
In that case, you may get a Form 1099-K.
This form is quite different than the other two which were mentioned earlier.
A 1099-K is a form that payment processors send out to people who reach certain minimums in terms of transaction volume and the total value of receipts (200 transactions and $20,000).
So that’s a basic overview of the differences between all of the tax forms which you need to know about.
How Double Income Reporting Occurs
This is where things appear to get complicated, even though they aren’t, and shouldn’t.
And it’s not your fault whatsoever!
Every employer is required to send a copy of the W-2 to the IRS to match up with their income tax return.
It’s how the IRS knows that people (for the most part) are reporting what they earned and can’t cheat (although they always find a way).
The same thing happens any time a business or individual pays a non-employee more than $600…they send in a 1099-NEC to the IRS.
And if you qualify for a 1099-K–having in excess of 200 transactions AND more than $20k in gross billings running through a third-party payment processor like PayPal, Stripe, etc–a copy of that also goes to the IRS on your behalf.
But…wait just a second.
If you get both a 1099-NEC and a 1099-K, doesn’t that mean much more money is being reported than is actually being earned?
Ding ding ding ding!
That’s where you’re getting screwed over in a sense.
And why is that?
Here are the reasons for that:
This pretty much means that if a business pays a contractor via non-cash methods, they DO NOT file a 1099-NEC for those people.
It doesn’t say “Well, you can do it on either and if you’ve been filing 1099-NEC forms all along then you don’t have to stop now”.
It says plain and clear “NOT SUBJECT TO REPORTING” which means DON’T DO IT.
Heck, if you go and look at the other side of the equations, this is what the 1099-K instructions say:
Again, any payments by a payment settlement entity (ie: PayPal) do not get reported on a Form 1099-NEC.
But, for one reason or another, many companies, their (hack) accountants, or the companies they use to run payroll (since this is really a payroll issue at heart) don’t care.
In the end, what can, and usually does, happen is the IRS cannot match your reported income with the figures reported on your behalf because of this double income reporting.
The part that makes this suck more is that the IRS generally is 2 years behind on doing its matching thing.
So, in essence, you may have to wait around for up to 24+ months to find out if you will even be receiving that dreaded envelope with the IRS logo on it.
What To Do When You Get An IRS Notice
Now this is where you are going to change your tune about the IRS (Maybe. Possibly. Probably not.)
When you get a notice stating that the income you reported on your tax return doesn’t match the records the IRS received under your tax id number do not panic!
This is an automated notice which is just stating facts, nothing more.
It isn’t an indictment.
It isn’t a levy.
It’s not even a threat.
No one’s coming knocking at your door and no one is sending you to collections or even jail. (You need to start learning how to be more discerning about what you believe on the internet!)
It’s basically a notification of the difference and a chance for you to explain what may have happened to cause this discrepancy.
There is nothing to worry about!
What you need to do is keep a level head so you can deal with the issue quickly and efficiently.
How do you do that?
Follow these simple steps:
- Gather your info
It’s important to have your shit together before taking any action. You want to be able to see exactly what caused the issue, and that means having all of your 1099-NEC forms handy so you can match one or more to the difference the IRS is looking for. It’s something you can do on your own with a little work.
- Contact the IRS before the deadline
This will turn off the “follow-up notifications” where the threats and warnings start coming into play. All you need to do is call the number provided on the notice and say “I’m calling in response to the notice I received about my income not matching. What had happened was I was paid via a third-party payment service/merchant processing company and the company(ies) that paid me issued a 1099-NEC even though it wasn’t supposed to be filed. That is why my income looks to be lower on my tax return than what you have on file for me.”
- Write everything down
It’s important to make sure you have a record of everyone you spoke to and when. I don’t care if you have to write it on the palm of your hand, but every time you speak to someone about anything regarding this situation make a note of it. Write down the IRS agent’s name and ID number. Notate the date and time of the call. Do the same for anyone you speak to at the company you are dealing with or their accountant/payroll processor. Being able to point to facts will help your case more than you can anticipate.
- Do what the agent tells you
There are two things that can happen next. One is the agent will ask you about the specific 1099-NEC forms that were erroneously issued. If that/those do indeed equal the difference, then they may close it out right then and there. The other thing that may happen is you may be told to contact the company(ies) and request that file an amended 1099-NEC for you.
- Call the IRS back if you don’t get a resolution
Sometimes, companies don’t want to spend the time and/or money fixing a problem they themselves have created unless it’s widespread or there is pressure coming from “above” to do so. If you were told to try and get an amended 1099-NEC done on your behalf and the company refused, you can get help from the IRS. You can call the same number from the notice, although it’s difficult to get to the same agent easily. Most of the time, there aren’t dedicated agents unless the situation is more serious so you may have to do a little explaining again, although there should be notes on your account for the new agent to get caught up with. Tell them that you tried to resolve the situation, giving them all of the information you wrote down during all of your interactions.
The IRS is only interested in factual numbers.
If you can show that your numbers are factual ones, then it shouldn’t be very hard to get things like this squared away more easily.
Just don’t freak out at the slightest sign of trouble or even the words Internal Revenue Service.
Two things will help you through this:
- Keeping your wits, and
- Following directions
If you approach this thing from a calm and logical place, you’ll make it through quicker and less stressed than if you didn’t!
Avoid Double Income Reporting From The Start
There is something that you can do to try to avoid this ordeal right away.
Rather than waiting to see if you’ll be put in this situation, you can be proactive.
Reach out to the companies you work with.
More specifically, find out who the person in charge of each company’s payroll department is–that’s the department that issues the 1099-NEC–or the person in charge if there isn’t a payroll department.
Let them know that since you are getting paid via PayPal (or via your merchant account) they DO NOT BELONG FILING A 1099-NEC on your behalf.
If they say that “we have to” for any reason, refer them to my article about when a 1099-NEC should be issued.
Then, offer to give them my information so they can get in touch with me and I’ll tell them exactly what they “have to do” and “don’t belong” doing.
If all else fails, you can always contact the IRS and file a complaint against any business which refuses to abide by the rules and purposefully goes against what the instructions clearly state.
Trust me, if they’re doing it to you, they’re doing it to plenty of others and they deserve to be reprimanded and fined for willfully screwing with you!
It sucks to be put in a situation like this.
I’ve already heard from several people who have and the good thing is, at least a few businesses have been willing to “consider” changing the way they operate in terms of issuing 1099-NEC forms to freelancers when they shouldn’t be doing so.
All you can do is report what you know to be accurate information and only pay your fair share.
Then let everything else unfold as it will and deal with it when it comes up.
At least you’ll be prepared in the event you do get that dreaded IRS notice!
1099-NEC and Identity Theft
Sometimes the 1099-NEC you receive isn’t incorrect due to the method of payment or the form of business you operate.
There is another instance that comes up quite often.
Tax fraud and identity theft.
It’s really easy to do, too.
All it takes is getting someone’s name and address.
An identity thief will create a fake 1099-NEC with a real company’s name and address, but with a false email or phone number in the sender section.
Then they mail it out to unsuspecting taxpayers who freak out when they receive it.
The taxpayer then calls the number and gives their full information to “verify” that it’s them, then…
You’ve just become a victim of identity theft.
One way of protecting yourself from this form of identity theft is to check the info on the form.
Is your social security number correct?
Is your legal name in the payee field or is it a “nickname”–a would-be identity thief could get that wrong which would be a clear sign of a scam?
Verify the email and the phone number that is listed in the sender section against public records or on the “company” website directly.
Also, be sure to read through my article on identity theft protection to be aware of other kinds of scams and schemes; I also cover many ways to keep your information secure.
Have you ever received a 1099-NEC when it wasn’t supposed to be sent to you? How did you react? What did you do to resolve the problem? Share your experiences so others know that it’s not just them and to give them hope that it can be rectified 🙂
Really appreciate you writing this article. I am fairly certain I’ve received a fraudulent 1099-K from paypal. I am a paypal user, and my parents received a letter at their house addressed to me, an address I haven’t used for years, and it turned out to be a paypal 1099-K. It had almost everything you would expect on it, such as their legitimate address and business name, a customer support number 888-883-9770 Ext. 2 with “If you have questions contact:”, but was missing my social security number and any other identifiable details such as phone, email. The 1099-K gross transactions were completely incorrect from my business account, and this tax form was never sent to me anywhere else or available online via their website. I have no actual way to confirm its validity. I did some digging into it though, and my friend who received a legitimate 1099-K from paypal had a completely different looking copy, with different formatting, fonts, and included his SSN.
All my business accounts include my SSN, my business names, and I am confident none of these numbers match anything on my records. I also have not got any tax forms available for these accounts. I am convinced that this “1099-K” I received is a scam using my available info, designed to get me to call and divulge my information in order to correct this mistake. However paypal support has been extremely unhelpful and in the back of my mind I am worried this is legitimate but completely inaccurate. What do you think? My form looks significantly different (but very passable) from my friend’s 1099K.
I am self-employed and receive 1099’s regularly. I filed for an extension and am just now getting to my taxes. It is common to have minor differences in NEC. I have 2 issues:
My question is what should I do? I’m trying to talk to someone in both companies but, I keep getting answering machines. Should I care? I can just subtract the 1099 amounts from my Gross income like I normally do, if I have enough to cover the error. My concern is these companies look like they are trying to hide money or something and I don’t want it biting me in the butt.
I hope I explained everything well.
Thank you in advance.
I work for a construction company and we have been handling insurance claims from hurricanes. We have received several 1099-NECs from the insurance companies. This was not income, it was insurance proceeds paid to repair homes. How do we handle this?
If I’m understanding this correctly, the company you work for was approved by the insurance companies to do hurricane repairs on the insured homes. The insurance companies paid your employer–not the homeowners–and then the insurance companies send your employer a 1099-NEC.
If that’s the correct summary, then it is indeed income that your company received to do work. It doesn’t matter if that money came from the insurance companies or the homeowners themselves. As such, as long as your employer is reporting all of its income (meaning ALL) then it shouldn’t matter if they get a 1099-NMEC or not, as that’s just a formality. That form is simply a summary of what was paid, not stating that it was extra money to the company.
I own a small computer repair business and I received a 1099-NEC from a customer for the total amount they paid me for the year, I have already included there payments in my business income, what should I do with this 1099-NEC? It appears if I add it, it looks like another business and gives me no where to explain it was part of my regular business income.
Thanks for your help
The 1099-NEC is only a reporting tool, it doesn’t mean that you got paid again. You only report the amount you charged the customer once and “ignore” the 1099-NEC for reporting purposes.
If I pay an attorney via debit card, on the attorney’s payment portal, do I need to give them a 1099-NEC, or should the payment processor handle that?
No matter who you pay via a credit/debit card you don’t file any kind of reporting form–even if it’s an attorney–because that type of transaction gets reported on the 1099-K by the payment processor.
Thank you so much!
thank you for sharing this information.. I have a question.. I am a tattoo artist and have my own small business as a sole proprietor and I pay commission to a shop for each tattoo I do.. my clients pay me out right and the owners of the shop never pay me. I received a 1099-nec from the owners of the shop, but I do my own quarterly reporting and for the last few years have done my own federal taxes based on the total of my quarterly reports and this year they gave me that, but I don’t understand why, as they have never paid me for the tattoos I provide my clients. I am wondering what I should do? Any advice would be greatly appreciated.
Honestly, the only thing I can advise is to speak to the shop owner or to the person who does the accounting in the shop to see why they suddenly changed their practices. Without knowing the exact details of your contract–if you even have one–I really cannot comment on your situation but you can always speak to a business lawyer to make sure your arrangement is on the up-and-up.
Thank you so much for the response and the advise… and I understand that you can’t comment exactly but I just want to understand correctly that, when someone gets this form, it means that they were paid by a business.. and if I report my own earnings and this 1099-nec, it will be double what I made… which would be an incorrect amount because they never paid me anything correct?
The only time you should be worried about being given a 1099-NEC and duplicate income reporting is if you were paid via a merchant service (PayPal, Square, Stripe, QuickBooks Payments, etc) and received a 1099-K.
Because you are already reporting all of your cash receipts if you get a 1099-NEC it’s not going to “duplicate” anything because you aren’t reporting that as additional income–it’s just for the IRS.
Hope that clears things up!
HI Eric, I wanted to ask you, what should I do, I received a W2 form in February, instead of before Jan 31st. I filed my taxes in Mid-February. Now March 1st, I receive in the mail a 1099 NEC for an amount of $1,400, then 5 days later another 1099 NEC for $1,600.23 and I do not know what this is comprised of? For what kind of work, as I was an employee for 2021 for 4 full months. I asked the owner why I received two 1099 NEC forms and he told me to use the larger amount. But I have no idea if he will file both? Is that legal? Why was this not part of the W-2? I asked the owner to provide me with backup and I have not heard anything. I plan to give him 5 more days. What are my options at this point? Do I file a complaint with the IRS?. The Owner seems to not want to do anything about this.
Question: I am sure he will be owed a refund for 2022. Can we skip filing 2021 ty and include the 1099 on the 2022 ty or should we just wait until 2022 ty to file both the 2021 and 2022?
Note: When he finally receives the money, he will make a tax deposit immediately so I suspect, by the time we get to 2022 ty filing, all of the necessary withholding will be there and he will be due a refund for both years.
My husband is an independent insurance broker. His (formerly) largest client began sending him 1099 forms several years ago. The commission he made for this client was paid to him by a wholesaler representing the local BlueCross BlueShield carrier; the client never paid him commission directly. When they hired a new comptroller, she started demanding that we provide her with his Schedule A’s (which are provided by the insurance carriers, not the broker). He told her that the 1099s were not required and that it amounted to double reporting. She said she checked and that her company never sent them, even though the envelope plainly was marked with the company name and address. An accountant advised me to note the amount as a miscellaneous expense on his Schedule C, which I have done for the past several years. Is this still the correct way to handle this with the 1099-NEC? It still frosts me no end that this comptroller outright lied to us, but I can’t do anything about that.
I would suggest speaking to a tax attorney who specializes in the insurance industry. In general, only the company making the actual payment to a contractor should be sending a 1099. But because of the way that the insurance industry works with intermediaries and multiple people involved, it would be best to consult someone who is more familiar with that specific industry.
I received a 1099-NEC form from my previous landlord. A piece of my apartment building fell and damaged my car. The building owner reimbursed me for repairs that I made to my car after receipts were submitted. They issued me a 1099-NEC. What I was paid should not be considered income? What do you think? Is this considered fraud?
I received a 1099-NEC from one of my side jobs. He reported over $106,600 that I made but it was under $52,000. I need a corrected form but he’s not answering my calls, voice messages or text. I have copies of the checks I received. How do I report my income on my taxes? If I dont report what he said I made, I’ll have issues, but Im not about to pay taxes on money I never earned! HELP
The best thing to do is to report the amounts you actually received on your 1040. Then contact the IRS and explain the situation to them and let them know that you made many good-faith attempts to get the 1099-NEC corrected but you were unable to get a response from this person. They will be able to help you from there.