With tax season underway, I'm receiving 1099s left and right. Unfortunately, due to the fact that I also received a1099-K, much of my income is being double-reported.
The introduction of the Form 1099-K a few years ago has many people trying to figure out what they need to do with this information. I receive a PayPal 1099-K, and it's brutal because many of my clients are still issuing me 1099-MISC forms — even though they shouldn't be.
1. The IRS Doesn't Expect Them to Issue Me a 1099-MISC
For the longest time, clients have been issuing me the 1099-MISC. If you pay a contractor at least $600 in a year, you're supposed to issue a 1099-MISC. That's The Rule. At least it has been for years.
But now things have changed, thanks to the 1099-K. This is a relatively new form that payment processors like PayPal are required to issue if you make at least $20,000 in a year and engage in at least 200 transactions through the payment processor. This describes my interactions with PayPal, and as a result, I am issued a 1099-K.
If your client pays you through PayPal (or another third-party processor), s/he isn't supposed to. And that's straight from the IRS website:
I wish my clients understood that they don't have to issue me a 1099-MISC. All it does is muck things up for me. As long as they have good records of payment, they can still list me as a business expense. They just don't need to send the IRS (and me) a 1099-MISC because PayPal has already taken care of it with the 1099-K.
2. They Boost My Taxes By Double-Reporting My Income
Already, I have some of my income double-reported. About $6,000 of the income reported on 1099-MISC forms received from clients is also included on the 1099-K because these clients paid through PayPal that means that instead of having $6,000 in income reported, the IRS thinks I made $12,000. While I obviously make more than that, it's not cool that the IRS thinks I make $6,000 more than I do. That's enough to bump me into another tax bracket, and when I'm responsible for the self-employment tax, that extra $6,000 means another $900 in taxes — on income I don't even have.
It's the self-employment tax that will really kill you on double-reported income if you're a freelancer.
3. They Create More Work for Me (and Them) with the 1099-MISC
I know that some clients have accountants that still don't understand the 1099-K and how it works. Not all clients are up-to-date and many of them have different theories about how to manage businesses and taxes. However, the IRS doesn't expect you to issue me a 1099-MISC, so please don't.
The 1099-MISC forms I get from some of my clients ensure that I have to do extra work. If I want to prove to the IRS that I'm not making as much money as they think I am, I have to reconcile my income. That means going through it all and cross-referencing which items in my PayPal account correspond with the specific amounts on various 1099-MISC forms. Luckily PayPal has made this a little easier by offering a downloadable spreadsheet that includes all the transactions for the year so I can identify the items. But it's a lot of work, and a tedious time suck. I could be building my business, making more money with the time I spend cross-referencing my 1099-K information with my 1099-MISC forms.
Clients even create more work for themselves (or their accountants) since they have to fill out the 1099-MISC and send it out. That's an expense itself. Perhaps a small expense and time use, compared to what I have to deal with, but it's still an unnecessary waste of resources.
I wish my clients understood these things, like my new accountant, Eric Nisall, does. I wish my clients' accountants were as up on things as Eric is. Because this is a mess, and it's been going on since the the introduction of the 1099-K. I'm doing my best to educate my clients, but I fear that this is one of those things that will take even more time before it's widely understood.
Until then, gird yourself freelancers: you can expect to fight with the IRS over double-reported income.