For a business, regardless of the business entity or the size of the business, taxation is an area in which even a small mistake can become very costly. Failure to properly account for payments to independent contractors can lead to steep penalties. However, penalties, interest, and additional taxes are not the only consequences a business owner should worry about when making a tax-related mistake. Business taxation mistakes can lead to expensive and time-consuming tax audits. A tax compliance lawyer sees first-hand the consequences for business owners who do not understand business taxation laws.
Speaking with a business taxation lawyer to discuss various issues related to business taxation can help avoid tax-related errors. One area in which many business owners struggle is determining when they must issue an IRS Form 1099-MISC for payments to independent contractors, vendors, and other parties.
What is the General Rule for Issuing a 1099-MISC to Independent Contractors?
The general rule for businesses issuing a 1099-MISC is that the business must issue a form to each person or entity to whom you paid $600 or more by check, cash, or bank transfer (ACH) during the tax year. Payments reported on a 1099-MISC form includes payments for income, services, rents, prizes, awards, and other amounts. You issue a 1099-MISC to an individual, partnership, Limited Liability Company (LLC), or Limited Partnership (LP). You do not issue this IRS tax form to an S or C-Corporation.
Exceptions to this general rule include payments for personal purposes. You only issue 1099s for payments made during the normal course of business. However, there are other exceptions to these general rules for payments to independent contractors.
For instance, if your payment was made by debit card, credit card, or through a third-party vendor service, you may not need to issue a 1099-MISC. A business taxation lawyer can help you with any questions you may have about issuing IRS Form 1099.
Payments Made Through PayPal and Other Third-Party Vendors Including Venmo and Wave
It can be confusing to know when to issue a 1099 form if you pay vendors, sub-contractors, or individuals using PayPal, Wave, or Venmo. In most cases, if you use a third-party vendor to pay for services of independent contractors, you are not required to issue a 1099-MISC. PayPal and other third-party payment services are required to issue a 1099-K to report income transferred using its service. The third-party payment service issues a 1099-K when an account receives $20,000 in gross payments for goods or services with a volume of at least 200 payments.
However, there is an exception to this rule. If you use the Friends and Family option for payment through PayPal, or a similar option through Venmo or Wave, you may need to issue a 1099-MISC for the payment. The tax form will only be issued if the payment meets the other requirements for issuing a 1099-MISC (i.e. amount, entity, services, etc.). The third-party payment service generally assumes transactions using services like PayPal’s Family and Friends option are non-business transactions; therefore, it will not issue a 1099-K for these amounts.
Seeking Help With 1099-MISC Questions
If the IRS requires you to issue a 1099 form and you fail to do so, you could face penalties and other consequences. It is best to seek the advice of a trained business taxation lawyer to avoid making a costly mistake. An attorney trained in business taxation law can answer questions related to 1099s and other business tax filings. Schedule a consult with business taxation attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients with their tax planning needs throughout, Maryland, Virginia, and the District of Columbia.
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