September 25, 2016

Must You Send 1099 Forms to Contractors Paid Via PayPal or Credit Card?


tax time

The deadline for mailing 1099-MISC forms to recipients this year is February 2, 2015.

Here’s a frequent question we get here at Small Business Trends.  It concerns payments you made to vendors, independent workers and service providers last year via PayPal or credit card:

If my small business paid independent contractors or other businesses using PayPal or a credit card, must we send them a 1099-MISC form for federal income tax purposes?

The answer is: No.

You are not required to send a 1099 form to independent contractors such as freelancers, or to other unincorporated businesses such as LLCs, if you paid them via PayPal or credit card.

That is the case even if you paid the recipient more than $600 last year.  (The normal threshold for when 1099-MISC forms are required is  when you’ve paid the recipient a total of $600 or more.)

Instead, in the case of electronic payments, the credit card companies and payment companies will handle any required reporting.

Those electronic payment providers are required under certain circumstances to send out a different version of the 1099, called the 1099-K, instead.

We verified this information with Barbara Weltman, a tax expert and author of the JK Lasser’s Small Business Taxes books.  She confirmed that the IRS currently does not require 1099-MISC forms to be sent for payments made electronically.

According to Weltman, “The instructions to Form 1099-MISC say ‘Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.’  So payments made by a credit card, PayPal, or gift card (any payment constituting an electronic payment) means the payer doesn’t report the payments on Form 1099-K.  The bank or other processor of the payments has the reporting obligation.”

Instructions for IRS 1099-MISC form can be found here (PDF).

Should You Send 1099-MISC Anyway?

If in doubt, it doesn’t hurt to send 1099-MISC forms to the businesses or independent contractors you paid $600 or more last year — even if you sent the payment via PayPal or used a credit card.

That is the general consensus among accountants and tax professionals.

Here’s why.  There are penalties for failing to send out 1099-MISC forms.  But there’s no penalty for sending 1099 forms if they turn out not to be required.

Weltman confirmed that some businesses choose to send 1099s anyway. “Businesses are allowed to issue 1099-MISC (and may do so) regardless of the way they make payment.  They just aren’t required to send a 1099-MISC,” she adds.

For Payees, Will 1099-K and 1099-MISC Mean Double Reporting of Income?

Now let’s step in the recipient’s shoes for a moment.  Many self-employed entrepreneurs and unincorporated small businesses not only send out 1099 forms, but also receive 1099 forms.

What if you receive a 1099-MISC for income you know was paid to you or your business electronically, such as via PayPal?  And what if you also receive a 1099-K form from PayPal?

Won’t it mean double counting that income?

That is a valid concern.

When preparing your tax return, go over all 1099-MISC and 1099-K forms you have received.  If you know that the 1099-MISC includes funds that you received via an electronic service or credit card, you will want to make sure you do not just add up the total of both forms. If you did, you’d be over-reporting your income.

This can be confusing for recipients.

There’s another wrinkle.  You may not receive any 1099 form for some income.

That’s because electronic payment services are only required to send 1099-K forms when the total amount paid through them is $20,000 and there were 200 transactions.  It’s quite possible you may not receive a 1099-K form at all, even though payments were sent to you via electronic means.

But you still are required to report all income you made.

The lesson for recipients is:  don’t just add up your 1099-MISC forms and 1099-K forms, to determine your reportable income.

Separately track your income. Reconcile it against your bank records, for income tax purposes.

For more information, read: Fast Answers About 1099 Forms for Independent Workers.  

Tax time  via Shutterstock

22 Comments ▼
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Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

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22 Reactions

  1. Aira Bongco

    Thanks for clearing that up. I guess this is an often mix up in this area.

  2. If I do not qualify for a 1099-K and my employer does not send a 1099, will I still have to pay tax on my income?

    • Anita Campbell

      Yes, Mallory, you still are required to report ALL your income. The 1099s are for information purposes only. You should use some kind of accounting or bookkeeping program to keep track of all your income. Check your bank records and PayPal records, etc. to see how much income you received.

      – Anita

      • Thank you. Will there be an obvious section while completing my taxes to report this income? This is the first time I’ve been paid as a consultant and with Paypal.

        Thanks again for your quick response.

  3. Great content Anita!

    We have some cool stats around 1099 Independent Contractors and taxes in General, do you cover more topics related to this?

  4. How do I report income through PayPal, If I do not qualify for a 1099-K and my employer does not send a 1099? Do I need to fill out a Schedule C OR Schedule SE or BOTH? Will I still qualify for EIC?

    • Anita Campbell

      Hi Monica,

      Go into PayPal in the history section, and download the history from 1/1/2014 thru 12/31/2014. That will be your record of money you received via PayPal. Also, check your bank records for your income there, in case you received checks or made other deposits. That will simply help you determine how much money was paid to you. Don’t forget to include any cash payments you received, if the cash did not go into your bank account. Remember — as far as the government is concerned, it’s your obligation to account for all the money you received in the course of your business. It does not matter whether you received a 1099 or not — you still must tally up all the money you earned during the year in your business. The 1099 form is “for information purposes” only. It is not your tax return.

      Now let’s turn your attention to your tax return. For filing your tax return, you next determine your business expenses and which ones you can deduct. You do that on Schedule C, if you are a sole proprietor and are NOT a corporation. Schedule C is how you determine your net profit (income minus allowable business expenses). The difference after deductions, is what you report to the IRS as taxable business income.

      Then you use Schedule SE to calculate the self-employment tax you owe to the Social Security Administration. Because remember, you don’t have an employer paying into Social Security on your behalf.

      Those two Schedules get bundled up with and attached to the appropriate version of your 1040 tax return (either, 1040, 1040-A or 1040-EZ).

      As far as the earned income credit, you may still qualify for that. It is available to the self-employed and to small business owners who meet certain income requirements. The instructions are here:
      http://www.irs.gov/Individuals/EITC,-Earned-Income-Tax-Credit,-Questions-and-Answers

      If all of this is too confusing, let me give you a bit of advice. Go to a tax preparation company and get them to help you. Yes, it will cost you a little bit for the service. But it’s worth it because you won’t have to deal with complex tax forms and try to turn yourself into a tax expert overnight.

      I used to be an attorney and learned about tax information over a period of many many years. But even I use a CPA firm to help file my taxes in my business and personal life. It’s no shame to ask for help.

      Good luck!
      Anita

  5. I made referral payments and commissions via paypal. How do i account for those since I did not issue any 1099 and the payments were over $600?

  6. I want to disagree with “If in doubt, it doesn’t hurt to send 1099-MISC forms”, as it is hurting me. I was paid a rather large amount via PayPal by a company and they ALSO sent a 1099 (this is for the 2013 tax year). I was contacted by the IRS stating I under reported my income and need to pay an additional $9,000. Since they company who sent the 1099 MISC was not supposed to, the advice I was given was to have to sent a “corrected” 1099 MISC. The company refuses to, and they insist they are correct in sending the 1099 MISC. I had to send the IRS my PayPal statements showing this company paid me via PayPal, and I am waiting to hear if that is enough information. So, it CAN hurt to send one that is not necessary. This company is insisting (even though they use paypal to pay me) that they are not using a 3rd party payment processor.

    • Anita Campbell

      Hi Tricia,

      It’s a confusing situation, to be sure.

      It’s just one more example of how Congress didn’t really think this through when passing the 1099-K law.

      A lot of people when filing their tax returns find there are differences between the 1099s they received and their reported income for the year. The 1099 is informational, only, and is not dispositive of your tax liability.

      It happens a lot that 1099s don’t match up exactly.

      For instance, differences can occur at year end. If you are on a cash accounting basis and didn’t receive a check until the following January, but the payor actually paid it out right at the tail end of December, you may receive a 1099 with a higher amount that you actually took in (on a cash accounting basis).

      By the same token, you may have received amounts for which you get no 1099 of any kind. Example: if amounts were paid via an electronic payment service, but don’t meet the $20K/200 transactions threshold for receiving a 1099K, and the payor doesn’t send you a 1099-MISC, your 1099s will be lower than your actual payments received.

      And finally, as a payor to some contractors, I can tell you we get payees who actually complain to us when they didn’t receive a 1099 MISC, even in situations where our accountant and lawyer have advised we don’t need to send one. They want it for their own record-keeping. For example, if they are incorporated as a corporation.

      So this issue has a lot of nuances to it.

      Accountants often also suggest that when filing your return, to include an explanation of any major variance. To head off any issues, in advance.

      Good for you for getting a large amount (revenue is good), although I am sorry it is putting you through extra explanation to sort it out.

      Anita

  7. My 1099 has more than wages on it. It also includes reimbursement monies. How do I separate on my return? I shouldn’t have to pay taxes on equipment that I purchased for my client.

  8. According to your suggestions, even though it’s not required to send 1099s for those ind. contractors paid via paypal, you can and this should not be a problem if you do? However, I am not sure what role I need to take in the situation I’ve been contacted about this week.

    I had someone contract me that received one from me in 2013 – for less than $40, at that time we were sending them out to all regardless of amount through on online system – who is being audited by the IRS for that year because she received 1099s from several companies that also paid her through paypal. And the IRS is taking her for both payments…. Most for far greater amounts.

    She states that she needs a corrected 1099 for that time showing $0 paid, since the payments were through paypal. I assumed all she needed to do was reconcile the two payments as one and the IRS should be able to see that from her paypal records? But she is pushing that she must have the correction.

    What would you recommend in this situation? I’m not even able to find 2013 correction forms on the IRS website at this time. It seems like she should be able to validate this through her own bookkeeping as well without my intervention?

  9. What a HUGE loophole in reporting/receiving 1099s !! A $20,000 loophole to be precise! CrAzY !!

  10. Does this still apply if the payments made through PayPal were withdrawn from your bank account instead of a debit or credit card?

    Thanks!

  11. I have a question about this. What if i receive a 1099 for work i did, but that i was paid for electronically. Should i ask the business to amend their return otherwise it seems i will have the income reported twice.

  12. Can’t help but feel this whole article is misleading people….
    For 1099 k only reports totals (if over 20k and more than 200 payers) that has been run through a vendors (contractors) credit card terminal.

    Form 1099 MISC is designed to say I paid someone $600 or more.

    If you pay someone, more than $600 the IRS requires that you send them a 1099-MISC
    https://www.irs.gov/pub/irs-pdf/i1099msc.pdf
    Page one, pretty clear.

    • Anita Campbell

      Bruce, what you said is what I originally thought. But it’s not nearly as clear as that.

      Read page 2 of the same document, where it says this:

      “Form 1099-K. Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.”

      From a payee’s standpoint, they get upset because they may receive two 1099s, covering the same sum of money. I had one person write to me and say he got audited and insists that it was because he received a 1099 MISC from a payor who paid via PayPal and also a 1099K from PayPal, with some overlap of the same sums. Whether that is why he got audited, I have no idea. But in his mind, that was the reason.

      What many don’t realize is that sums may not match 1099s no matter what. Because PayPal may not send a 1099K in certain cases in any event.

      Bottom line: the whole thing is utterly confusing to everyone.

      And the fact remains that some tax preparers and accountants are still advising clients that paid through PayPal or credit cards, to send 1099 MISC forms so that they meet their requirements.

      – Anita

      • The same thing is happening to me for 2014 and 2015. The IRS insists on having a correction from payer or states the tax must be paid (on the double reported income), even after I sent them the credit card transaction receipts showing the client paid by credit card (not cash or check). So it does seem that they use the forms as more than informational, but proof of income you must pay if a correction is not issued. It’s the only proof they accept according to their letter to me.

        So I also don’t like your advice that when in doubt go ahead and file a 1099 MISC. If you paid by credit card you should not file a 1099 MISC, so people don’t have to go through a nightmare trying to get it resolved. Why do that to your vendors? You should know if you paid by credit card or not. It’s very frustrating!

  13. My question relates to payments from Upwork (formerly Elance). I understand that if I elect to be paid by Upwork though Paypal that I’ll get a 1099-K through Paypal for anything over $20k in a year or 200 transactions.

    But if I elect getting Upwork payments paid directly to my bank account through ACH, will I get a 1099 of any kind? Or do I just tally up payments and use that number?

    Thanks!

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