All small business owners know the importance of hitting the tax deadlines on time, otherwise we risk being out of compliance with the IRS. If you or your small business worked with independent contractors this past fiscal year, then you’re probably aware of the IRS deadline for the 1099-MISC form on January 31, 2018. However, one thing you may not be aware of is a large tax reporting hole which solely depends on how you paid your contractors.
The 1099-MISC is the form in which a business must file for independent contractors receiving $600 dollars for receipt of goods or services. That concept itself is fairly simple ($600 equals reporting to the IRS), but depending on the method of payment used is where things become more complicated. This is because of a rule created in 2008 in the Housing and Economic Recovery Act (HERA) that didn’t go into effect until 2012. This bill had a provision inside which (surprise) had nothing to do with the housing crisis.
Essentially, the rule states that if you, business owner, pay a independent contractor via a third-party service (Paypal, credit card, or debit card), you would not file a 1099-MISC for that contractor, but the third-party would file that income instead on a 1099-K. Sounds air-tight so far.
Except, it’s not.
The rules of the 1099-K are not the rules of the 1099-MISC but for third-party vendors. The 1099-K rules state that reporting is mandatory ONLY when “gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee.”
Just on reading this statement alone, it seems as if there’s a huge tax reporting hole (approximately $20,000 dollars) if paying someone via a third-party. This can’t be right… right?
When Kelly Phillips Erb asked IRS spokesperson about the rules and also to confirm this language as being the correct interpretation “even if they’re over that $600 threshold and even if they are under the $20,000/200 threshold?” Yup, that’s correct, even if the IRS admits to that being a loophole.
Some tax advisors are advising businesses to file 1099-MISC regardless of method of payment. Some tax advisors are advising businesses to file according to the rules set down by the 1099-K (20,000/200 rule). Confusion and conflicting instructions abound. At the end of the day, the choice of how to file is best up to you and your tax professional, as it appears that the IRS is having issues with this ridiculous tax reporting issue.
This article should not be used as tax advice. If you need assistance with the forms and procedures referenced in this article, please consult an accountant or other tax professional.
Alexandra Bohannon has a Master of Public Administration degree from University of Oklahoma with a concentration in public policy. She is currently based in Oklahoma City, working as a freelance filmmaker, writer, and podcaster. Alexandra loves playing Dungeons and Dragons and is a diehard Trekkie.
