Episode 44: Form 1099-K Part 3
This week on Information Return Intelligence, we wrap up our three-part series on Form 1099-K by tackling a common question: Why not just issue a Form 1099-NEC and avoid all the complexity?
The answer is simple: because the regulations say not to.
Here are the other parts:
When 1099-K Takes Priority
Suppose you pay a contractor $1,000 by check or ACH in April and another $1,000 through a payment app in July. If the July payment is made in a way that transfers the reporting obligation to the payment app, you are responsible only for the $1,000 April payment for purposes of Form 1099-NEC.
That creates an interesting result. You paid the contractor $2,000 during the year, and your books may show $2,000 of contract labor expense. But because only $1,000 is subject to reporting by you, you would not issue a Form 1099-NEC under the $2,000 reporting threshold applicable for 2026.
This is why businesses need systems capable of distinguishing between payments potentially reportable on Form 1099-NEC and payments potentially reportable on Form 1099-K.
Why Not Report Everything Yourself?
A common response is: Why bother sorting through all of this? Why not simply report the entire $2,000 on Form 1099-NEC?
The regulations under Sections 6041 and 6041A provide that transactions subject to both those reporting provisions and the Form 1099-K rules of Section 6050W are reported under Section 6050W — not under the Form 1099-MISC or 1099-NEC rules.
This is different from the familiar corporate exception.
Generally, you aren't required to issue a Form 1099 to a corporation, although there are exceptions such as certain legal and medical payments. But the corporate exception generally does not prohibit you from voluntarily issuing a Form 1099.
The Form 1099-K rules are different. If a transaction could be subject to Form 1099-K reporting, the regulations direct the transaction into the Section 6050W reporting regime rather than the Form 1099-MISC or 1099-NEC regime.
What If No 1099-K Is Actually Issued?
That doesn't necessarily change your responsibility.
Certain third-party settlement organizations may not actually issue a Form 1099-K because the payee doesn't meet the applicable transaction and dollar thresholds. But the regulations tell the payer to disregard those thresholds when determining whether the payment should instead be reported on Form 1099-NEC or Form 1099-MISC.
In other words, the fact that the contractor ultimately doesn't receive a Form 1099-K doesn't automatically mean you should issue a Form 1099-NEC instead.
The Practical Takeaway
Businesses can't solve the complexity of Form 1099-K by simply saying, "We'll issue a 1099-NEC for everything."
Instead, you need to know how each payment was made and who has the reporting obligation.
That becomes especially important when the same contractor is paid in multiple ways during the year — perhaps by ACH, credit card, PayPal, Venmo, or another payment method. The amount you ultimately report on Form 1099-NEC could be very different from the contractor's total payments for the year.
One way to make this easier is to consolidate payment methods whenever possible. The fewer ways you pay contractors, the easier it becomes to track transactions and determine who is responsible for information reporting.
Listen to the full episode of Information Return Intelligence for the details and examples.
This week on Information Return Intelligence, it's part three out of three on our series about Form 1099K. My name is Jason Dinison. Let's get started with this week's episode. Remember not to make any final decisions about anything based on anything that you see or hear in this podcast. This podcast is not tax advice and I'm not your accountant. Always pay your own advisors before making final decisions. We've had a part one and a part two of this show. It's been a while since we've had those two parts, though, so we'll have links in the show notes to help you out on finding those. In those other parts, we talked more about what the 1099K is, and also this issue of when you pay a contractor in a way that could be subject to 1099K reporting, you don't have to issue a 1099 NEC. And that's really what we're coming back to in this episode is this idea of a payment to a contractor that could be subject to 1099 K reporting, you don't have to issue a 1099 NEC, and we're going to answer the question of with all of this complexity around 1099K, why not just issue the 1099 NEC yourself? And the short answer is you shouldn't do that, because the regulations say not to. We'll talk more a little bit later, but first let's just remind ourselves of this whole issue of not sending a 1099 NEC if it could be subject to 1099 K reporting. In April, let's say that you write a check to your contractor, or you pay him by ACH, and it's $1,000. Then you pay him another $1,000 in July, but in July you pay him through a payment app, and you transfer the reporting obligation to the app. And there's two different ways you can do that, which we've talked about before. One is marking goods and services as the payment type, the other is paying through your contractor's business profile. Either way, if you do it that way, you've transferred the reporting obligation to the app. And so let's say you did that on this $1,000 in July. So two payments of $1,000 each, $2,000 in total. You're responsible for reporting on the April payment, but not on the July payment. Your bookkeeping system needs to be able to keep track of this so that at the end of the year, when you pull reports, you're getting accurate numbers as far as what do we have to put on the 1099 or do we need to issue a 1099 at all? And the whole do we need to issue a 1099 at all that comes into play on this example. You have paid $2,000 of contract labor. And when you file your business tax return, you'll show $2,000 of deduction for contract labor. Your financial statements will show a contract labor expense of $2,000. But you won't issue a $1099 NEC at all in this situation. So the reporting threshold is $2,000 in 2026. We probably all know that. If you don't know that, well now you do know that. And that is what you paid your contractor, but you're only responsible for the thousand dollars that you paid your contractor in April. The other thousand, you transferred the reporting to the app. So you won't issue a reporting form at all in this situation because the amount that you're responsible for is less than the reporting threshold. So that's why you need your systems able to generate reports that show these things accurately to you. Now when you hear this, you might ask, because a lot of people do ask this, why not just issue the 1099 NEC? This seems like a lot of hassle and a lot of headaches trying to figure out is this 1099K, is this 1099 NEC? Why not just put $2,000 on the 1099 NEC and be done with it? The short answer is you shouldn't do that, because the regulations say not to. You shouldn't expect anything other than that out of this show. If you've listened to other episodes, there's always a long answer. We'll get to that next after we hear a word from our sponsor, IOFM. If you're a financial operations professional, IOFM is the place for you. IOFM's membership website, IOFM.com, features industry research and best practices, metrics and benchmarking data, policies, case studies, tools, templates, and critical compliance and corporate governance resources. The institute also produces on-demand e-learning resources, including video trainings and web-based seminars, and they host industry leading conferences in the spring and fall. Learn more at IOFM.com. And now back to the show. 1099 NEC and 1099 Miscellaneous Reporting comes from sections sixty forty one and sixty forty one Capital A of the tax code. 1099 K rules come from Section 6050 Capital W. And if you look at the regulations under section 6041, it says transactions that are subject to reporting under section 6041 and 6050 Capital W will be reported under 6050 Capital W and not Section 6041. And the regulation goes on to say, and I'm paraphrasing here, that the thresholds that are in place for third party settlement organizations to issue a 1099K, you as the payer do not have to worry about those. If you pay by a method that could be subject to 1099K reporting, you don't issue a 1099 NEC. By the way, that's section 6041. There's a regulation under 6041 Capital A that says the exact same thing. So 6041 is more 1099 miscellaneous in general, and 6041 Capital A is 1099 NEC contract labor specific. Both sections have a regulation that says the exact same thing. If it could be subject to 1099 K, you don't issue a 1099 NEC or 1099 miscellaneous. Now some people will respond to this by saying, isn't this the same as the corporate exception? Where you're not required to send a 1099 to a corporation, but you can. And the answer is no, this is not the same concept. So if we look at the corporate exception, the regulations do say that you're not required to send a 1099 to a corporation. Most of the time. Now there's those exceptions that we sometimes talk about for like medical and health care and legal payments, but you're generally not required to send a 1099 to a corporation. But it's not a prohibition on sending a 1099 to a corporation. You can. So it is not the same as the corporate exception. Now we've talked before, and you might be familiar with the 200 transaction and $20,000 threshold that comes into play on 1099 Ks, where some issuers of 1099K won't have to send a 1099K if the transaction count is less than 200 or the dollar amount of the transactions is less than 20,000. And the regulations say you as the payer ignore that threshold, which means if a payment that you make could be subject to 1099K, you don't issue a 1099 NEC or miscellaneous. So let's say that your contractor is a sole proprietor and you pay him $20,000 for contract labor, and you pay him through PayPal, you've marked the appropriate boxes to transfer the reporting obligation to PayPal. The regulations specifically say this transaction is reported under 1099K rules. Now, the nature of this transaction through PayPal is PayPal is subject to that 200 transaction and $20,000, those two thresholds, before they would actually send your contractor a 1099K. However, the regulations tell us that you, as the payer, ignore those thresholds. And so you don't issue a 1099 NEC in this situation to your contractor. Because 1099K could apply. Therefore, you don't issue a 1099 NEC. If you do, you'd be in violation of the regulations. So as we start to land this plane and reach the end of our podcast this week, let's wrap things up by just saying you can't get around this issue by saying I'm just gonna issue the 1099. A lot of people think that that's what you can do. Is this hard, it's complicated, I'm not messing with it, I'll just issue the 1099. You can't do that. The regulations say not to. So that means if you pay with a credit card or debit card or through a payment app, you'll need to track those payments and figure out who has the 1099 obligation for each of the different transactions. And the solution to this really is have as few payment methods as possible. I know that that's hard. Sometimes in the real world, you might have contractors who want to get paid through Venmo, and another one who wants you to pay through PayPal, and maybe there's some other app that they want you to pay them through, and others just want you to do a bill pay ACH, and others want you to write them a check, and you've got all these different payment methods, maybe a few of them accept credit cards or whatever. I understand in the real world it's not as easy as it sounds to just have like one payment method, but as much as possible, if you can consolidate your payment methods and have as few of them as possible, that makes your life a lot easier on the tracking and determining who needs to issue a 1099, and the other thing is if you pay someone in multiple different ways, you might be issuing a 1099 NEC for a very different amount than the total amount that you paid them. If sometimes you're doing an ACH transaction and sometimes you're using Venmo and sometimes using your credit card, you're gonna have to sort through all of those transactions to figure out what really do I need to put on the 1099 AEC. So consolidate those as much as possible and have as few payment methods as possible, and that'll make your life a lot simpler with all of this. That's a wrap on another episode of Information Return Intelligence. You can find all of our podcasts at podcasts.dynasonmedia.com. Information return intelligence is sponsored every week by IOFM and produced by Dynason Media Ventures. I'm Jason Dinason. We'll talk to you again next week. Dynason Media Ventures.