Form 1099-K, Part 3

This is the third and final installment in our 1099-K series.

In prior parts, we touched on how, when paying expenses that could be subject to 1099-K reporting, you don't issue a 1099. Usually we're talking about contract labor/1099-NEC, but it could also be other types of payments.

This requires tracking in your systems. Here's an example:

Your business writes a check to That Guy for $1,000 for contract labor in April.

You then pay him another $1,000 in July using a payment app. You mark goods and services (or pay via That Guy's business profile), thus transferring the 1099 reporting to the app ... but only for this transaction.

Outcome: you'll issue Form 1099-NEC to That Guy for $1,000 (the April payment) but not the July payment.

This can certainly make your head hurt. You have paid $2,000 of contract labor – your business tax return and financial statements will properly show $2,000 as the deduction for contract labor, but you’ll issue a 1099-NEC for $1,000.

After hearing all this, some people ask: why not just issue the 1099-NEC?

Let's examine.

Reporting Requirements

The requirements for businesses to issue Form 1099 comes from Section 6041 and Section 6041A (6041A is specific to contract labor; 6041 is more for 1099-MISC and other types of 1099s).

Form 1099-K rules come from Section 6050W.

From Regulation 1.6041-1, with my emphasis in bold.

Transactions that are described in paragraph (a)(1)(ii) of this section that otherwise would be subject to reporting under both sections 6041 and 6050W are reported under section 6050W and not section 6041. For provisions relating to information reporting for payment card and third party network transactions, see § 1.6050W-1. Solely for purposes of this paragraph, the de minimis threshold for third party network transactions in § 1.6050W-1(c)(4) is disregarded in determining whether the transaction is subject to reporting under section 6050W.

(1.6041-1(a)(1)(iv)).

And Regulation 1.6041-1A says something similar:

For payments made by payment card (as defined in § 1.6050W-1(b)(3)) or through a third party payment network (as defined in § 1.6050W-1(c)(3)) after December 31, 2010, that are required to be reported on an information return under section 6050W (relating to payment card and third party network transactions), the following rule applies. Transactions that otherwise would be reportable under both sections 6041A(a) and 6050W are reported under section 6050W and not section 6041A(a). For provisions relating to information reporting for payment card transactions and third party network transactions, see § 1.6050W-1. Solely for purposes of this paragraph, the de minimis threshold for third party network transactions in § 1.6050W-1(c)(4) is disregarded in determining whether the transaction is subject to reporting under section 6050W.

What Does This Mean?

Some people mistakenly think that the situation here is the same as for payments to a corporation ... but it's not the same.

Think about it this way: That Guy has formed That Guy, LLC, taxed as an S-corporation. You pay his corporation $20,000 for contract labor. You are not required to send a 1099-NEC, because this is a corporation.

But you “can” send a 1099 if you want to. And if you send a 1099-NEC for $20,000, you have not mis-reported anything; you did indeed pay the corporation $20,000. You just don't "have to" send a 1099.

But with transactions subject to 1099-K, it's very different. The Regulations specifically say, if a transaction is subject to 6050W (i.e. 1099-K), it is reported under 6050W and not under 6041 or 6041A (so, not on a 1099-NEC or 1099-MISC).

That Guy is an individual/sole proprietor. You pay him $10,000 for contract labor. You paid him with your corporate credit card. The Regulations specifically say the transaction is reported under 6050W, aka the 1099-K rules.

The processor of this transaction will send That Guy a 1099-K for $10,000. If you send a 1099-NEC for $10,000, you have: 1) caused an overstatement in reporting of income in the IRS’s system, and 2) violated the Regulations which explicitly say this is reported under 6050W.

A similar example:

That Guy is an individual/sole proprietor. You pay him $20,000 for contract labor. You paid him through PayPal and marked the appropriate boxes to transfer the reporting obligation to PayPal.

The Regulations specifically say the transaction is reported under 6050W, aka the 1099-K rules. PayPal is a TPSO, so they may or may not send That Guy a 1099-K (he’d need to receive more than $20,000 and have more than 200 transactions processed). The Regulations say 6050W applies here, not 6041 or 6041A, meaning you don’t issue a 1099-NEC, and you apply this rule IGNORING the $20,000/200 transaction threshold. So again, you are violating the Regulations if you issue a 1099-NEC.

Conclusion

The point of all this is, you can’t get around this by just “issuing the 1099.” When you use credit and debit cards, or pay through apps, you’ll need to track those payments and who is issuing the 1099 for the transaction.