If your business uses independent contractors, you already know how to file a 1099. Most business owners understand how and when to file 1099-NECs and 1099-MISCs—but do you know what the 1099-K is and how it could impact the 1099-NECs that you file? In this post, we’ll do a deep dive into the 1099-K and how it impacts your other 1099 filings.
What is a 1099-K?
The 1099-K, Payment Card and Third Party Network Transactions, is a 1099 information form that payment settlement entities provide recipients for whom they facilitated transactions … yeah, that language is a little dense for us, too.
Let’s unpack this a bit. Your business may use a third party to facilitate transactions, like a credit card processor such as First Data, an electronic payment processor like Paypal, or a third party settlement agent like Practice Ignition. Basically, if your business is getting payments electronically via credit card, debit card, or a third party entity then your business (or you, if you’re a sole proprietor) may receive a 1099-K.
Here’s what the 2021 Form 1099-K looks like:
Who issues the 1099-K, and when will I receive it?
The 1099-K is issued by those processing companies from payment card transactions (like debit, credit, and stored value cards) and/or third party payment network transactions in excess of $20,000 AND more than 200 transactions.
For example, if your company uses Paypal to facilitate payments from your customers and your company has received more than $20,000 and more than 200 transactions, Paypal will issue your company a 1099-K. Keep in mind there are exceptions to this rule: some states require 1099-Ks to be issued if payments are in excess of $600, so be sure to check your state’s laws. Also, some payment processors will issue a 1099-K below the limits noted above.
If a payment settlement entity issues your business a 1099-K, you should receive it no later than January 31 each year, for the proceeding year’s transactions.
If I pay freelancers and contractors via credit card, do I still need to issue a 1099-NEC?
Reporting requirements can be complex when your company uses payment processors to pay contractors. Normally, if your company pays a contractor more than $600, your company will be required to issue that contractor a 1099-NEC form. However depending on what method of payment you used, you may not need to issue that 1099-NEC. Let’s take a look at a couple of examples.
Scenario 1: Sophie’s Flowers LLC paid their contractor Tom’s Delivery Service (a single member LLC) $21,000 during the year.
Of that $21,000:
- $15,000 was paid via credit card, and
- $6,000 was paid via check
In this circumstance, Sophie’s Flowers LLC only needs to issue a 1099-NEC for $6,000 to Tom’s Delivery Service. The $15,000 paid via credit card would be covered through any potential 1099-K the credit card processor would issue Tom’s Delivery Service.
Sophie’s Flowers does not need to notify the credit card company about the $15,000 in payments, or issue the credit card company a 1099-NEC, as the credit card company is not a contractor for Sophie’s Flowers.
Scenario 2: Sophie’s Flowers LLC pays Tal’s Decor for seasonal decorating for their retail location. Sophie’s Flowers paid Tal’s Decor via Paypal $22,000 over four transactions during the year.
In this circumstance, no 1099-NEC would be issued to Tal’s Decor even though Tal’s Decor is not guaranteed to receive a 1099-K. Since these transactions fall under the 1099-K rules, Sophie’s Flowers should not send a 1099-NEC because that could cause Tal’s Decor to receive two 1099’s for the same money received.
As illustrated in the examples above: when determining if your business needs to send 1099-NEC forms to contractors, it is important to determine how those payments were made and if they are potentially being reported on a 1099-K form. Additionally, while the payment processor is responsible for issuing 1099-Ks, you, the business owner, may need to share the contractor’s name and information with the entity that is responsible for filing the 1099-K with the IRS and giving your contractor a copy.
As you can tell, understanding when to use a 1099-K may be complicated. If you are unsure whether or not to issue a 1099-NEC when your company made electronic payments to customers, please reach out to a CPA or an accountant to discuss further.
What if payments to contractors were processed as consumer (not business) transactions?
Do not assume that if your contractors are using Paypal or another electronic payment processor that those payments are automatically covered by a 1099-K. If those payments were processed as consumer transactions instead of business transactions then there would not be a 1099-K issued—and in such a scenario those payments should be on a 1099-NEC.
Again, we highly recommend that you check with your CPA or tax pro to ensure compliance.
What if my client reports payments on a 1099-NEC that are also on a 1099-K?
Your company should review any 1099-Ks you receive to make sure you are recording that income correctly and that you did not receive any 1099-NEC’s that duplicate those payments. If so reach, out to the business that issued the 1099-NEC to have them corrected.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance. Find an accountant