Most small business owners are aware of the 1099-MISC reporting rules for independent contractors. They may not like them, but the know about them. What they may not know about is the 1099-K and how it affects the completion of the 1099-MISC form.
The 1099-K form was part of The Housing Assistance Tax Act of 2008, signed into law by President Bush. The intention was to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Yeah, right! The government is basically trying to catch people who don’t report all of their income.
As a small business owner, you will never have to issue a Form 1099-K. It is issued by credit card companies, PayPal and other third party merchants who process payments on behalf of businesses. The bottom line of this system is this: If you pay a vendor’s bill with your credit card, then that payment will be reported on a 1099-K at year-end from that vendor’s credit card company. Meanwhile, the instructions for Form 1099-MISC indicate that businesses should NOT complete Form 1099-MISC if the payment is already reported on a 1099-K. In other words, by paying your vendor with a credit card, you no longer have to issue a 1099-MISC for that payment. Here are the instructions straight from the 1099-MISC:
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, what does this mean for you as you are preparing to file 1099 forms at year-end?
- Make a note of HOW you paid each vendor. If you are using QuickBooks, you can enter “debit,” “PayPal,” “Visa” or “MC” (among other codes) to indicate that you paid the vendor with a credit card or other third-party network. (A full list of the appropriate codes can be found here.)
- When calculating total payments made to independent contractors, do NOT include those excluded payments in your totals. This may completely eliminate some vendors from your potential list of 1099 recipients.
- Lastly, if you hate dealing with and sending 1099 forms at year-end, simply pay everyone via PayPal or with a credit card! Problem solved!
Running a small business is hard and it is easy to screw up those 1099 forms. Contact us today if you’d like the help of a professional bookkeeper in your business!
Have any questions about 1099-MISC forms? Please share them in the comments below!
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.