Income Double-Reporting: 1099-K vs. 1099-NEC
What happens when a client submits a 1099-NEC for payments they made by credit card?
American International College | Phase Zero Design
Disclaimer: This information is not to be construed as legal or financial advice. I am not an accountant, nor a lawyer. I am simply using an example from a situation I’ve experienced in my professional life to bring attention to the cause and effect of double-reporting income. Before responding to any letter from the IRS, please consult an accountant. If you don’t have an accountant, get one. I’ve worked with mine since 2013 and it’s worth every penny.
BACKSTORY
Late last year, I received that lovely envelope bearing the IRS's logo. Their letter stated that in 2018 the company I use to invoice my clients and process credit card payments, Square, had reported a sum of money on a 1099-K form. They submitted that to the IRS on my behalf. They then stated that I failed to report that income and was now responsible for a tax bill with interest.
Here's the thing: I know how this works, and I did report that income.
So, why the mix-up?
When a client pays by credit card, that third-party payment processing company is obligated to report those transactions at the end of the year. Since it was money that "passed through their hands" and on to mine, less a transaction fee, I'm sure they would want to report that money wasn't income for them. And it keeps business owners honest.
But, if your client then submits a 1099-NEC, reporting that same money they paid by credit card, this money is now being reported twice.
Yup, I know. Fun.
After gathering evidence to support that my paperwork was in order, and clarifying that this was all a misunderstanding, I asked my accountant to reach out to them and point out that someone at the IRS didn't know math. My accountant then sent off a certified letter to the IRS stating as much for a mere $500 fee, I must add.
Now, I'm sure my letter is buried in a pile of similar letters because I'm sure I'm not the only one engaging in correspondence with the IRS this year. So, I don't expect this to resolve itself anytime soon.
SEE ONE, DO ONE, TEACH ONE
If a client pays for your services by credit card, that credit card processing company will keep a record of those transactions and file a 1099-K at the end of the year on your behalf. It's essential to cross-reference your payments to track which invoices were paid by credit card or check. It is possible that a client may also pay you by check and by credit card for multiple jobs throughout the year.
At the end of the year, to help your clients, send them a nice note letting them know if they are required to report any payments they made by check to you, totaling over $600 for the year. If it's a mixed bag of check and credit card transactions, do the math for them and be nice about it.
Let them know that they are not to report all of the credit card transactions they made on a 1099-NEC. If they tell you, "We have to report it," now would be an excellent time to educate them a bit more. Inform them about the hassle this will cause and the costs you might incur to remedy this with the IRS later.
Here's another long and tedious article by an actual accountant that explains when a 1099-NEC needs to be filed. It will go into numbing detail about the tax law. Still, it may give you some clout when informing your clients that double-reporting is a real issue, and it also may be against the law.
I hope this helps someone out there! Cheers to everyone pushing on and taking 2021 two-steps forward.
Thanks,
Joe
"Money is not nice. Money got no friends but more money."
Quote by J. Steinbeck / The Winter of our Discontent