If I paid a contractor via Paypal, do I need to issue a 1099-NEC?

[Uncle Morris]

I've seen threads about receiving a 1099 from Paypal and similar processors. But I'd like to make sure about whether I need to issue a 1099-NEC to a contractor whom we paid via Paypal.

Sites such as https://www.nolo.com/legal-encyclopedia ... iders.html
indicate that Paypal is the entity that has to issue the 1099, not me. Here's what Nolo says:

However, if you're paid through a third-party settlement organization (TPSO) like PayPal, the payor doesn't have to report the payment to the IRS on Form 1099-NEC. Instead, the TPSO has to file a different form called "Form 1099-K" with the IRS.

Not having had contractors before and not having had to issue a 1099 before, I just want to get confirmation from those who know such things that Paypal as the TPSO will take care of the 1099 and we can ignore it even though we are the payors. Right?

[MP123]

If the contractor is a Corporation (or LLC taxed as such) then no, regardless of payment method.

The 1099-NEC instructions also provide an exception that may apply:

Form 1099-K. 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-NEC. See the separate Instructions for Form 1099-K.

[Uncle Morris]

He's an individual.

Yes, I think that exception is what applies here, with Paypal being the "payment settlement entity."

[MP123]

He's an individual.

Yes, I think that exception is what applies here, with Paypal being the "payment settlement entity."

The 2022 tax year is transitional for 1099-K, it isn't required below $20,000 and 200 transactions. Then next year should be $600 and any number of transactions to align with 1099-NEC requirements.

So, it's possible that the contractor will not receive a 1099-K from Paypal for last year. It's not clear that you would have a 1099-NEC filing requirement in this case, but I suppose that's possible.

[toddthebod]

https://www.irs.gov/businesses/small-bu ... ion-return

If, as part of your trade or business, you made any of the following types of payments, use the link to be directed to information on filing the appropriate information return.

For each person to whom you have paid at least $600 for the following during the year (Form 1099-NEC):
Services performed by someone who is not your employee (including parts and materials)

You are not required to file information return(s) if any of the following situations apply:

- You are not engaged in a trade or business.
- You are engaged in a trade or business and
the payment was made to another business that is incorporated, but was not for medical or legal services

[Uncle Morris]

He's an unincorporated individual contractor for my wife's business, and we paid him more than $600 but less than $20,000 in 2022 in 12 transactions.

[toddthebod]

He's an unincorporated individual contractor for my wife's business, and we paid him more than $600 but less than $20,000 in 2022 in 12 transactions.

Then her business is responsible for issuing him a 1099-NEC, regardless of how he was paid.

I think you are getting caught up in the PayPal/1099-K stuff. That's irrelevant, you are not a payment processor. You need to file the 1099-NEC for payments to contractors of over $600.

(I originally thought you meant contractor like a guy who worked on your house.)

[Uncle Morris]

He's an unincorporated individual contractor for my wife's business, and we paid him more than $600 but less than $20,000 in 2022 in 12 transactions.

Then her business is responsible for issuing him a 1099-NEC, regardless of how he was paid.

I think you are getting caught up in the PayPal/1099-K stuff. That's irrelevant, you are not a payment processor. You need to file the 1099-NEC for payments to contractors of over $600.

(I originally thought you meant contractor like a guy who worked on your house.)

But won't he then get two 1099s for the same payments (one from us, and one from PayPal)?

[toddthebod]

He's an unincorporated individual contractor for my wife's business, and we paid him more than $600 but less than $20,000 in 2022 in 12 transactions.

Then her business is responsible for issuing him a 1099-NEC, regardless of how he was paid.

I think you are getting caught up in the PayPal/1099-K stuff. That's irrelevant, you are not a payment processor. You need to file the 1099-NEC for payments to contractors of over $600.

(I originally thought you meant contractor like a guy who worked on your house.)

But won't he then get rwo 1099s for the same payments (one from us, and one from PayPal)?

He might, but a 1099 is an informational return. It doesn't mean he has to report the income twice.

[MP123]

He's an unincorporated individual contractor for my wife's business, and we paid him more than $600 but less than $20,000 in 2022 in 12 transactions.

Then her business is responsible for issuing him a 1099-NEC, regardless of how he was paid.

I think you are getting caught up in the PayPal/1099-K stuff. That's irrelevant, you are not a payment processor. You need to file the 1099-NEC for payments to contractors of over $600.

(I originally thought you meant contractor like a guy who worked on your house.)

But won't he then get rwo 1099s for the same payments (one from us, and one from PayPal)?

He might, but a 1099 is an informational return. It doesn't mean he has to report the income twice.

I don't think that payments made through a third-party network like Paypal are reportable on 1099-NEC any longer. This is per the instructions for 1099-NEC (posted above), but there is little authoritative information elsewhere.

I note that Quickbooks does not (by default) include such payments on the 1099-NECs that it generates, for whatever that's worth.

There have been many changes in recent years (and even recent weeks) to 1099-MISC, 1099-NEC, and 1099-K requirements so it's hard to say for sure what the current status is.

[toddthebod]

I don't think that payments made through a third-party network like Paypal are reportable on 1099-NEC any longer. This is per the instructions for 1099-NEC (posted above), but there is little authoritative information elsewhere.

I concede I was not aware of this change. The guidance does support this assertion. It seems like there's a huge gap in reporting now if a $600 1099-NEC is no longer filed, and Paypal is still only reporting $20,000+.

[Uncle Morris]

On our end, got our 1099-K from Paypal today (for payments we received in the business). Here's what it says:

You have received this form because you have either: (a) accepted
payment cards for payments, or (b) received payments through a third
party network that exceeded $20,000 in gross total reportable
transactions and the aggregate number of those transactions
exceeded 200 for the calendar year. Merchant acquirers and third
party settlement organizations, as payment settlement entities (PSE),
must report the proceeds of payment card and third party network
transactions made to you on Form 1099-K under Internal Revenue
Code section 6050W. The PSE may have contracted with an
electronic payment facilitator (EPF) or other third party payer to make
payments to you.

So it seems that this is an AND condition: payments have to exceed $20,000, AND the number of transactions must exceed 200.

Per what MP123 wrote up-thread,

The 2022 tax year is transitional for 1099-K, it isn't required below $20,000 and 200 transactions. Then next year should be $600 and any number of transactions to align with 1099-NEC requirements.

So, it's possible that the contractor will not receive a 1099-K from Paypal for last year. It's not clear that you would have a 1099-NEC filing requirement in this case, but I suppose that's possible.

I think this is what's happening - Paypal issued a 1099-K to us, but since our contractor doesn't meet those volume requirements, we have to issue him a 1099-NEC. Right?

[toddthebod]

On our end, got our 1099-K from Paypal today (for payments we received in the business). Here's what it says:

You have received this form because you have either: (a) accepted
payment cards for payments, or (b) received payments through a third
party network that exceeded $20,000 in gross total reportable
transactions and the aggregate number of those transactions
exceeded 200 for the calendar year. Merchant acquirers and third
party settlement organizations, as payment settlement entities (PSE),
must report the proceeds of payment card and third party network
transactions made to you on Form 1099-K under Internal Revenue
Code section 6050W. The PSE may have contracted with an
electronic payment facilitator (EPF) or other third party payer to make
payments to you.

So it seems that this is an AND condition: payments have to exceed $20,000, AND the number of transactions must exceed 200.

Per what MP123 wrote up-thread,

The 2022 tax year is transitional for 1099-K, it isn't required below $20,000 and 200 transactions. Then next year should be $600 and any number of transactions to align with 1099-NEC requirements.

So, it's possible that the contractor will not receive a 1099-K from Paypal for last year. It's not clear that you would have a 1099-NEC filing requirement in this case, but I suppose that's possible.

I think this is what's happening - Paypal issued a 1099-K to us, but since our contractor doesn't meet those volume requirements, we have to issue him a 1099-NEC. Right?

That's the weird thing. This is what the instructions say:

Form 1099-K. 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-NEC. See the separate Instructions for Form 1099-K.

That certainly sounds to me like as long as you pay by credit card or PayPal, you are not responsible for filing a 1099-NEC. Furthermore, the 1099-K requirements are based on a collective total. You have no way of knowing if this contractor earned $20,000 via PayPal. And that creates a huge reporting gap, where businesses have stopped issuing 1099s for credit card and PayPal payments, while PayPal isn't issuing 1099-Ks for amounts between $600 and $20,000.

[strummer6969]

Is this for your trade or business, or for a contractor who did work for your home?

[MP123]

That certainly sounds to me like as long as you pay by credit card or PayPal, you are not responsible for filing a 1099-NEC. Furthermore, the 1099-K requirements are based on a collective total. You have no way of knowing if this contractor earned $20,000 via PayPal. And that creates a huge reporting gap, where businesses have stopped issuing 1099s for credit card and PayPal payments, while PayPal isn't issuing 1099-Ks for amounts between $600 and $20,000.

Yes, I agree that OP has no way of knowing if the contractor will receive a 1099-K from Paypal. It does seem like there's a "doughnut hole" in 1099 reporting requirements for this year. Next year the 1099-K limit drops down to $600 and any transaction, so that should simplify things.

Other than the 2022 1099-NEC instructions there is certainly great clarity that you do need to issue a 1099-NEC. That's the way it's been for all prior years. There is a late filing penalty of $280 for 1099-NEC if you were required to file but didn't. If I were in your shoes I probably would not, based on the 1099-NEC instructions.

[Uncle Morris]

Is this for your trade or business, or for a contractor who did work for your home?

He's a contractor for my wife's business. Not a home repair person.

[Uncle Morris]

That certainly sounds to me like as long as you pay by credit card or PayPal, you are not responsible for filing a 1099-NEC. Furthermore, the 1099-K requirements are based on a collective total. You have no way of knowing if this contractor earned $20,000 via PayPal. And that creates a huge reporting gap, where businesses have stopped issuing 1099s for credit card and PayPal payments, while PayPal isn't issuing 1099-Ks for amounts between $600 and $20,000.

Yes, I agree that OP has no way of knowing if the contractor will receive a 1099-K from Paypal. It does seem like there's a "doughnut hole" in 1099 reporting requirements for this year. Next year the 1099-K limit drops down to $600 and any transaction, so that should simplify things.

Other than the 2022 1099-NEC instructions there is certainly great clarity that you do need to issue a 1099-NEC. That's the way it's been for all prior years. There is a late filing penalty of $280 for 1099-NEC if you were required to file but didn't. If I were in your shoes I probably would not, based on the 1099-NEC instructions.

I can ask the contractor if he received a 1099K from Paypal. But those IRS instructions sure seem to say that, since we used Paypal to pay him, we are not required to file a 1099-NEC. @toddthebod, do I understand you to be saying that we should file one anyway?

[toddthebod]

That certainly sounds to me like as long as you pay by credit card or PayPal, you are not responsible for filing a 1099-NEC. Furthermore, the 1099-K requirements are based on a collective total. You have no way of knowing if this contractor earned $20,000 via PayPal. And that creates a huge reporting gap, where businesses have stopped issuing 1099s for credit card and PayPal payments, while PayPal isn't issuing 1099-Ks for amounts between $600 and $20,000.

Yes, I agree that OP has no way of knowing if the contractor will receive a 1099-K from Paypal. It does seem like there's a "doughnut hole" in 1099 reporting requirements for this year. Next year the 1099-K limit drops down to $600 and any transaction, so that should simplify things.

Other than the 2022 1099-NEC instructions there is certainly great clarity that you do need to issue a 1099-NEC. That's the way it's been for all prior years. There is a late filing penalty of $280 for 1099-NEC if you were required to file but didn't. If I were in your shoes I probably would not, based on the 1099-NEC instructions.

I can ask the contractor if he received a 1099K from Paypal. But those IRS instructions sure seem to say that, since we used Paypal to pay him, we are not required to file a 1099-NEC. @toddthebod, do I understand you to be saying that we should file one anyway?

Not at all! I think you can rely on the IRS guidance and not file one because you paid via PayPal. I'm merely observing the reporting gap this has created due to different reporting cut-offs for the various 1099s. But that's the IRS's problem, not yours.

[Uncle Morris]

Thanks!

[Uncle Morris]

I found the IRS announcement from December 2022 that they were postponing the lower threshold for issuance of 1099-K by TPSOs such as Paypal. Pretty clear that, unless my contractor hit the old thresholds for sales and for transactions, he won't be getting a 1099-K from Paypal for 2022.

Here's the announcement: https://www.irs.gov/newsroom/irs-announ ... TnW182VDyo

And here's the Notice 2023-10: https://www.irs.gov/pub/irs-drop/n-2023-10.pdf

I am not an accountant, and may have missed something (especially in the references to various sections of the Code), but it looks to me like the IRS left the question of whether businesses like ours should issue a 1099-NEC under these circumstances entirely untreated.

Meantime, I've asked our contractor to see if Paypal issued him a 1099-K anyway. Could be that he met the thresholds with other customers. If they did, I conclude that I don't need to issue a 1099-NEC. If they didn't, I don't know!

[MP123]

Meantime, I've asked our contractor to see if Paypal issued him a 1099-K anyway. Could be that he met the thresholds with other customers. If they did, I conclude that I don't need to issue a 1099-NEC. If they didn't, I don't know!

Remember the contractor is required to report the income you paid them regardless of whether it's shown on a 1099-K or 1099-NEC or no form at all. It's really their problem to worry about. If you're still concerned about your requirement to file 1099-NEC you could just do it anyway (contrary to the 1099-NEC instructions). There is much support for that, and I don't believe there is any penalty for filing a correct but non-required information return. I'm certain that many businesses will do just that this year.

But I don't think it's neccessary in this case, regardless of what Paypal does, based on the 1099-NEC instructions.

[Uncle Morris]

Thanks, MP123!