Why You Might Not Get A 1099-MISC From Your Clients

You’re probably (hopefully!) aware that if your business is a sole proprietorship or LLC and a client has paid you more than $600 in non-employee Tax formcompensation, they’re required to send you a 1099-MISC form for the just-completed tax year.

 

But did you know clients who pay you through PayPal or credit card aren’t required to issue you a 1099?

 

The Burden Of Reporting Electronic Payments Made To Solopreneurs Doesn’t Fall On Their Clients

That’s right. Starting in 2011, the IRS put the responsibility of reporting electronic payments on PayPal and the credit card companies. They are required to issue a 1099-K form—but only if you received $20,000 or more. Which means you might not get a 1099 at all.

 

Honestly, up until yesterday, I wasn’t aware that clients who make electronic payments to me through PayPal weren’t on the hook for sending 1099-MISC. One of my clients who pays by PayPal monthly discovered it when he went to process his 1099s for vendors.

 

I’m figuring other independent workers AND companies who do business with them aren’t in the know about this either.

 

Cause For Keeping Insanely Accurate Accounting Records

With not all clients realizing they don’t need to send 1099-MISC forms if they paid you electronically, you could end up with 1099s from them anyway. That raises the concern of both PayPal or credit card companies AND your client reporting your income (i.e., your income from that client could potentially be reported twice to the IRS). Moral of the story: KEEP ACCURATE INCOME RECORDS. It’s your best defense if discrepancies arise.

 

For more on this topic and 1099s in general, check out these helpful articles:

 

Must You Send 1099 Forms to Contractors Paid Via PayPal or Credit Card? via Small Biz Trends

Fast Answers About 1099 Forms for Independent Workers – UPDATED for 2015 via Small Biz Trends

General FAQs on Payment Card and Third Party Network Transactions via the IRS website

Form 1099-MISC, Miscellaneous Income via the IRS website

What Is the IRS Form 1099-MISC? via the Intuit TurboTax website

 

Disclaimer: All that I write on this blog is for your reading pleasure and informational (and sometimes entertainment) purposes only. It is not meant to serve as professional advice. Readers absorb and take information from this blog at their own discretion and risk. Please use responsibly.

One Easy Way To Save Yourself And Your Clients From A Headache This Tax Season

While most clients have their accounting act together, some don’t—and that can create problems for you as an independent contractor when it’s time to prepare Woman with headacheand file your tax returns.

 

I’ve gotten 1099 forms at the end of the tax year that either under- or over-reported the “nonemployee compensation” clients paid me throughout the year.

 

If the income records you report and those of your clients don’t match up, it’s a big deal. If they under-report, they’ll be paying more tax than they should be. If they over-report, it will bring you a boatload of aggravation. You’ll be stuck backtracking through records to show them where they made their error(s), and then you’ll need to wait until you get a revised 1099 before you can file your taxes. The income in your accounting data (whether in a system like Quickbooks, in Excel worksheets, or logged manually in a notebook) needs to match what your clients are saying they paid you.

 

After getting several inaccurate 1099s last year and dealing with the headache (and putting my clients through the hassle) of requesting that they be reissued with the correct information, I decided to get proactive in confirming our information is in agreement this year.

 

Here’s how…

One Easy Way Solopreneurs Can Make Tax Season Less Painful

Whether you use Quickbooks, Excel, or some other method of tracking your income by customer, export or create a file that shows (at the very least):

 

  • Dates payments were received
  • Check numbers (or other reference numbers if paid in a different way) associated with each payment
  • Amounts of payments
  • Sum of all payments for that tax year

 

Here’s a sample of what that might look like.

Sample-Client-Compensation-Record

I’ve sent one of these to every client who did at least $600 worth (the magic number for when that income needs to be reported on a 1099) of business with me in 2014.

 

By doing the same, you can show your clients what your records say so they can check to make sure theirs are in sync. That way, if you’re not in alignment, you can investigate and resolve the discrepancy BEFORE they issue their 1099s to you.

 

Keep in mind, whether your clients are doing their own bookkeeping or if they outsource it to someone else, mistakes can—and do—happen. By proactively exchanging information as tax season approaches, you might spare yourself and them from major headaches.

 

By Dawn Mentzer

 

Speaking of sparing yourself headaches, if you’re struggling to keep up with writing blog content that grabs attention and gives your readers value, let’s talk!

 

Image of woman with headache courtesy of stockimages at FreeDigitalPhotos.net

 

Please note that this post is not meant to serve as professional accounting advice. It’s for information purposes only.