As a business owner, you have a number of tax conundrums to consider. One of those might be whether or not you need to issue a 1099-MISC to some of your contractors.

It used to be fairly cut and dry. You were supposed to issue a 1099-MISC when the following condition was met:

  • You paid a contractor at least $600 in a tax year.

Today, things are a little more complicated, thanks to the existence of the 1099-K.

For you, the good news might be that you don’t have to worry about issuing a 1099-MISC. This is because if you use a third-party payment processor, that company is responsible for issuing a 1099-K.

Do You Pay Through PayPal? You May Not Need to Issue a 1099-MISC

Chances are that you are stuck in old habits. However, the IRS clearly states that it’s not your responsibility to issue a 1099-MISC if you go through a third-party payment processor like PayPal. Instead, if your contractor has at least $20,000 and 200 transactions coming through a third-party payment processor, s/he is supposed to get a 1099-K from that company.

However, it’s not up to you, as the business owner paying a contractor to determine whether or not s/he meets the threshold. You don’t have to issue a 1099-MISC if you pay someone through PayPal. It’s still up to the contractor to properly report his or her income to the IRS. You can consult with your accountant if you have questions, but for the most part, you only have to issue a 1099-MISC now if you pay your contractor directly with cash or check and you pay $600 or more in the tax year.

Your Contractors Will Thank You

The fastest way to annoy one of your freelancers or contractors during tax time is to issue a 1099-MISC for payment made through PayPal. This is because if your contractor receives a 1099-K, you have just double-reported a portion of his or her income.

This means that your freelancer or contractor now has to go through the process of cross-referencing and reconciling their income to prove to the IRS that they aren’t making as much money. If the IRS thinks that your contractor is making more, it will try to get more from him or her in self-employment tax, and the double-reported income could bump the contractor up into another tax bracket.

You could be prompting a tedious fight with the IRS as your contractor tries to convince the bureaucracy, with extra paperwork, that the income has been double-reported.

If you have been paying your contractor with PayPal or through another third-party processor, stay away from the 1099-MISC. You don’t need to send it to your contractor or to the IRS. You’ll save everyone time and energy in paperwork, and keep your freelancers and contractors happy because they won’t be stuck fighting with the IRS.

I'm Miranda and I'm a freelance financial journalist and money expert. My specialties are investing, small business/entrepreneurship and personal finance. The journey to business success and financial freedom is best undertaken with fellow travelers.

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