1099 tax forms are the bane of freelancers and the creator economy. Not just in terms of expecting your digital and physical mailboxes to get stuffed with them every February but because of the ever-growing confusion regarding their issuance. It has become insanely confusing to discern when your clients must issue a 1099 to you and if you are also required to issue them to people and companies you’ve worked with.
Regulations on 1099 issuance have been changing more often and rapidly relative to the legislative environment at the turn of the millennium. When making a living on the Internet went from a barely-understood niche to a colossal digital economy worth trillions of dollars, 1099 confusion only snowballed even more.
Initially, you only received a 1099 tax form if you were paid at least $600 for your services. But now there’s the 1099-K form for digital payment processors and third-party networks such as massive online marketplaces and gig work platforms.
The threshold for receiving a Form 1099-K is still $20,000 and 200 transactions per year. The new provision under the Inflation Reduction Act would change it to just $600 and no transaction threshold, but the IRS declared 2023 a transition year. After hearing concerns from the tax professionals and legal communities, the new effective date was pushed to January 1, 2024, while the agency awaits further action from Congress.
The American Institute of Certified Public Accountants (AICPA) proposed a $5,000 threshold for Form 1099-K to help close the tax gap without hassling people who just have a side hustle and don’t usually deal with the 1099 side of the tax world.
So, should you expect a 1099? Maybe, maybe not. Read on to find out what to do if you don’t get one.
How Did Your Client Pay You?
First, consider what the client or company paid you for.
The 1099-NEC form for non-employee compensation, which would describe a majority of freelancers, was discarded during the Reagan administration and brought back after the 2018 tax reform when contractor payments were otherwise reported on 1099-MISC. Form 1099-NEC has that $600 threshold self-employed people are familiar with.
However, you can expect to still receive 1099-MISC if you get royalties for writing for websites that pay based on views or selling your music, e-books, games, and other digital media. This threshold is just $10.
All money is green whether you were paid to help edit a book or receive royalties from the book sales. How did that book publisher pay you? Was it with a check or direct deposit initiated through their bank? Or did they use a digital payment processor like PayPal, Stripe, Wave, or Venmo? Perhaps a mix of the two?
Payments made with checks and direct deposit would require that publisher to file a 1099 if you were paid $600 or more for services and $10 or more for royalties. But if they paid using a digital payment processor, they don’t have to issue a 1099 form.
If the publisher used a mix of payment types, they would only owe you a 1099 form for the payments that didn’t go through a digital payment processor. Such as if they changed their payment policy from issuing checks to using PayPal.
The only exception to this would be if they paid with the personal or “friends and family” option to avoid fees on both sides. Since it won’t get flagged as a transaction to go on the Form 1099-K you might receive from the payment processor, they’d need to issue you Form 1099-NEC or 1099-MISC if it’s royalty income.
Why You Still Received a 1099 Form Even if You Weren’t Legally Owed One
You may still be confused as to why you received a 1099 from a company even if they didn’t owe you because you’re paid entirely through digital payment processors.
When a small company does this, it’s often because they don’t have that many payees, and they want to be sure they’re complying with the law. It only costs a few dollars per form on sites like 1099 Pro, which is far less than the penalties for not filing when they should have.
Large companies still send 1099s to payees they don’t actually owe them to because of system lags and technical debt that has caused business processes to not update in time. Similarly to small businesses, they continue to file them despite the costs involved for thousands or millions of payees out of fear they are not complying with the law.
What Happens if You Get a 1099-K for the Same Income?
This has been a nightmare for millions of freelancers: your client gave you a 1099, but the 1099-K reports all or some of that same income. How do you avoid being doubly taxed?
Assuming that you file as a sole proprietorship or single-member LLC, you would need to void the double-reporting by deducting it as an “other expense” in Part V and clearly labeling it as “double-reported 1099 income”.
If you use tax software, newer versions have a field for this exact issue. Still, you may need to manually reconcile in others since the IRS still needs to update Schedule C and other business tax forms to account for double-reporting. If you hire a tax professional, you must tell them how much income needs to be reconciled and from which payers and payment processors.
Who is Ultimately Responsible for Accurate Financial Records?
When you go into business for yourself, you need to be able to organize your finances. Even if you’re in the camp that wants a full-time staff job doing what you do instead of working independently. That means building a recordkeeping system or finding the right professionals that suit your professional and personal needs to make tax time less of a headache.
The American tax system is one of the most complex on the entire planet, and not just when it comes to your personal tax obligations.
Business tax filing is more onerous than it really has to be. But until a massive overhaul of the entire financial system and tax code takes place, which is pretty doubtful for millennials’ and zoomers’ lifetimes, it is the system we have to contend with whether we like it or not.
Sometimes you just won’t get a 1099 form when you were actually owed one because your information got lost in the wheel, you didn’t punctually submit a W-9 to them with up-to-date information, or the company got fast and loose with their compliance measures.
There have been several drivers for the big push to third-party digital payments like PayPal and Venmo. They reduce privacy risks for you and your clients. They are also fast and easy to set up, unlike clunky direct deposit mechanisms.
Most of all, third-party payment networks and massive online platforms now bear the brunt of a colossal compliance burden that large and small businesses have always contended with.
No matter how you received the payment, you must keep records of the amount, date, purpose, and date so you can correctly report your income. Even if Uncle Sam didn’t get a copy, you still need to accurately tell him what you made before Tax Day strikes. That’s not your clients’ responsibility.
This article was produced and syndicated by Wealth of Geeks.
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