Here’s a frequent question we get here at Small Business Trends. It concerns payments you made to vendors, independent workers and service providers 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