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Do I Have to Send a 1099-Misc?

***I AM NOT A TAX EXPERT.  THIS IS NOT ADVICE.  DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS.  THIS IS A PERSONAL EXPERIENCE.  IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF.  DO NOT MAKE ME BAN YOU FOR BEING STUPID.  THANK YOU.***

Today’s post happened because when a blogger puts hours into something, they blog about it.  Hopefully it’ll help some other self-employed person out there who uses Paypal for everything.

Background

My husband and I work from home with the online business I created in 2011.  I blog and we manage the advertising for my sites and other bloggers.  My online business uses Paypal for 99% of its money stuff.  The other 1% of our business is through personal checks.

When we get paid for groups (via Paypal), we then have to send everyone their cuts (via Paypal).  When our clients are paid for their own deals, they send us our cut (via Paypal).  I also do deals on my own sites, receive commissions from my eBooks, and get paid for freelance work and writing (all via Paypal).  Altogether, we are a great Paypal client and make them tons of money.

I figured out a way not to feel bad about all of their fees.  They save us hours and hours and some money for tax forms every January…

The Question

Every January, Mr. BFS and I receive the same question about a dozen times –  “Will you be sending me a 1099?”

Our short answer:  No, you won’t receive a 1099 from us.

Long Answer

No, we don’t send 1099′s.  We have based this decision in the past on information from the Instructions for Form 1099-MISC:

“Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K. “

And on the information from the Instructions for Form 1099-K:

“If you receive payments from a PSE on behalf of one or more participating payees and you distribute such payments to one or more participating payees, you are:

The participating payee with respect to the PSE who sent you the payment(s), and the PSE with respect to the participating payees to whom you distribute the payments.”

This means that we are considered the Payment Settlement Entity for you (our clients), but because we pay you with PayPal (who is also a Payment Settlement Entity), there are multiple PSEs for you.  This problem is also addressed in the Instructions for Form 1099-K:

“If two or more persons qualify as PSEs for the same reportable transaction, the PSE that submits the instruction to transfer funds must file the return.”

The Payment Settlement Entity in this case is PayPal.  While we tell PayPal to pay you, PayPal is the actual PSE that submits the instructions to a bank or other financial institution to transfer the funds.  PayPal is responsible for submitting to the IRS and to you a Form 1099-K if you received enough income through them during 2013.

Now, it is possible that you may disagree with my understanding of what “submits the instruction to transfer funds” means.  However, even if we are considered to have submitted the instructions to transfer funds, we used PayPal to complete that transaction.  Therefore, PayPal was an Electronic Payment Facilitator.  From the Instructions for Form 1099-K:

“If a PSE contracts with an electronic payment facilitator (EPF) or other third party to make payments in settlement of reportable payment transactions on behalf of the PSE, the facilitator or other third party must file Form 1099-K in lieu of the PSE.”

Because we used PayPal to complete the transaction, PayPal is the EPF and must file Form 1099-K instead of us.

We also got all of this information verified by a rep at the IRS Information Returns Center on January 23, 2014.  It took 2.5 hours of calls and hold time to find the right place and person with the info, but now we at least have her to back us up.  :-)

Other Reasonings

Also, if we were to send a 1099-MISC for $1000 (for example) to you and PayPal sent you a 1099-K for $1000 (because we paid you using PayPal), it would appear as if you made $2000 when you only actually were paid $1000.

So, if you make more than $20,000 a year via Paypal in 200 or more transactions, all of that income will be reported via Paypal’s 1099-K.  Yay for small business owners like me!  If you made less than $20,000 with Paypal, you should report the income but you won’t be receiving a 1099-K.  This also means that my clients that pay me via Paypal don’t need to send me a 1099-Misc either.  Paypal will cover it with our 1099-K.  Double yay!

Hope this helps!  Do you have to send 1099′s every year?

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6 comments to Do I Have to Send a 1099-Misc?

  • christie

    Boy oh Boy, do I hate IRS instructions!

  • I try to avoid having to send out tax forms where possible, but I did have to send out a 1099-MISC when we had our rental property – in order to have records of payments for our tax purposes, we had to send a 1099-MISC to any individual (aka handyman) who we paid more than $600 to fix up the house. It’s a PITA.

  • Did you verify with Paypal the threshold where they send out a 1099-K? Is it $600 or $20,000? The article says both – at the beginning it is said “If you received more than $600 in Paypal payments, you will be receiving a 1099-K from Paypal., but then at the end it is said “So, if you make more than $20,000 a year via Paypal in 200 or more transactions, all of that income will be reported via Paypal’s 1099-K”

    Methinks you got some bad advice from the IRS. I’ll try to get more details for you, but per what I (and an EA I showed this article to) understood in update classes for professional tax preparers, 1099-Misc is not going to replace the 1099-K.

  • I said that wrong – it should have been: the 1099-K is not going to replace the 1099-Misc.

  • @christie, we all do.

    @Mom, yeah, luckily our rent home only had two problems. We ended up using two different people at less than $250 each…

    @Wendy, ack! I corrected the post. Paypal will send a 1099-K to anybody who made $20,000 or more using 200 or more transactions. Anybody who made less than that should report their income anyway though (as always). The 1099-K doesn’t replace the 1099-Misc since the 1099-Misc is used in so many other situations. They just confirmed that we don’t need to send or receive any 1099-Miscs in our specific situation.

  • I’ll get more clarification on the above and let you know what I find, but IMO you’ve been given bad advice, and that includes the IRS rep. IMO, you need to send out your 1099-Misc.

    Something else from continuing ed: 1099-K amounts can be very easily overstated, and the IRS knows this and is prepared for this. 1099-K is INFO only, meaning the IRS is not going to use any of that info in actual return calculations – but wait a couple of years when UnderReporter goes back and starts verifying income to make sure it was reported and tax paid on it.

    Another interesting issue with those 1099-K’s? Did you see the individual boxes where income is reported by month received? The poor, poor self-employed taxpayer. They don’t have a clue what is about to hit them in underpayment of estimated tax penalties ….