25. Understanding 1099 Rules - Are You Issuing 1099s Correctly?

In this week's episode of Purposeful Profit, I'm clearing up the confusion I see among small business owners around the requirements for 1099 reporting. 

And this confusion is leading to 1099's being issued for incorrect amounts, to people who should not receive one, not being issue to those who should get one.

Tune into this week's episode and get the 1099 rules broken down for you in simple terms. You'll learn:

➡️ Who you should be issuing 1099’s to and who you shouldn’t
➡️ How to ensure you are applying the rules correctly
➡️ What to do if you get a request for a W9

Mentioned in this episode:

• Continue the conversation and book a free call
• IRS Form W9
• IRS 1099-NEC Instructions

Other resources:
Get your Simple Financials Bookkeeping template
Get Your 30 Days of Money Mindset Prompts


For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode25

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Welcome to Purposeful Profit, where I'll help you take your business to the next level. I'm Carla Moats, Finances and Strategy Coach and Fractional CFO for high-achieving female entrepreneurs. I'm here to empower women to build wildly profitable businesses to give them the freedom to live their dream lives. I'll use my more than 30 years of finance and consulting experience to take the mystery out of your finances, help you make more money, and go after your next big thing. 

Hi there and welcome to the Purposeful Profit podcast. Whether you are a new listener or a regular listener, I am super happy to have you here and glad you could join us. And I am Carla Moats, I am your host, and I am a financial accounting expert. More specifically, I'm a financial whisperer to female CEOs. I simplify their finances so they can put more money in their pocket. 

Today, we are talking about 1099s, and I’m in a large Facebook group of business owners, mostly coaches, and there is a lot of confusion around 1099s, who gets them, who doesn't, what to do if you get a request for a W9. This is the time of the year where the groups that I'm in, business groups, I mean, you start to see a lot of finance questions, is everybody's prep of their taxes and get down W2s and 1099s. And somebody had posted a question about, it was a coach and she said, "I got a request for a W9. I don't know why somebody would want my W9. I'm not a contractor to them." and then the following was a bunch of people posting about 1099s, and there was just a lot of misinformation. So what I want to do today is I want to clear things up. 

This podcast unfortunately is coming out a little bit late because 1099s are due on January 31st. This is really kind of an impromptu episode. And this is going to go live, I think on February 8th. So, but I still, there could be some of you sitting out there who still haven't filed your 1099s. So I still want to get this episode out there for you. But before we start, I have to do the little disclaimer that my attorney requires. This podcast is for informational purposes only. It does not cost to see tax advice. We do not have a, unless you're one of my clients, we don't have an accountant client relationship. So please see your own tax advisor about your own personal tax situation. You use this podcast for educational purposes. 

There are a variety of 1099s to get issued out there, but today I'm talking primarily about the 1099 NEC. NEC stands for non-employment compensation. We will also touch on the 1099K, which is what third party payment processors issue to you. 

First, let's talk a little bit. I think it helps to understand why 1099s exist? 1099s fundamentally are one way that the IRS guards against unreported income. I mean, I don't know if they officially tell you that, but that's the gist of it. They use the EIN, which is your employer identification number, or your social security number if you're a sole proprietor with an EIN. They use that number that's on the 1099. They basically match it up against tax returns to try and identify unreported income. But all businesses are ultimately responsible for paying taxes on income regardless of whether they get a 1099 or not. So if you're expecting a 1099 and you don't get it. That doesn't mean you don't have to report income on it. Same thing goes with the people you pay. If you do not issue them a 1099, they can't use that as a reason if they don't report tax on their income. It's more that the government wants that 1099, so that they can go in and, you know, compile all the 1099s. They've been a reporter for a specific EIN or social security number and make sure that that person's reported tax income, reported taxable income matches up. Now, as I mentioned, they are due on January 31st of each year, but if you go through here and you find out, that there's that either you've issued something in air or that you did not issue a 1099 that you should buy all means go ahead and file them because there can be penalties that get assessed and they are based on this business size and how late your filings are.

So in today's episode, I'm going to, I want you to walk away learning three basic things. Who you should be issuing 1099s to and who you shouldn't. How to ensure you're applying the rules correctly and what to do if you get a request for a W9. That was one of the things that's come up lately.

So let's dive in. So let's talk about who gets a 1099 NEC and who doesn't. So individuals, I'm talking about this right now from the perspective of who do you as a business owner issue a 1099 to. We'll talk a little bit later about who you would get a 1099 from, but this will really tell me who you should be issuing them to. So these go to individuals or non-corporate entities who pay more than $600 for services in the course of a trader business. So let's take that sentence apart a little bit. Individuals are non-corporate entities. So basically S-corps, C-corps don't get one. There's an exception that I'm talking about in a minute, but so it's somebody who's operating as a sole proprietor. So it could be an LLC who's not filing as an S-corp, but if they're an S-corporate C-corp with the one exception I'll talk about in a minute, they don't get a 1099. You need to pay them more than $600 for services. We’ll talk about what qualifies as services in a minute and the course of a trader business. So you do not pay 1099s, not issue 1099s for personal services. So this is for things that you are doing, you're paying for them in the course of providing and in the course of conducting your trader business. The corporate exemption that I mentioned does not apply to attorneys. So it doesn't matter if whether your attorney is an individual or a corporation, if you paid them more than $600, they get a 1099. 

Services include freelancers, contractors, consultants, and other service providers, examples, your bookkeeper, your CPA or tax professional, your attorney, your virtual assistant, your business coach. So yes, your business coach, we'll talk about that a little bit more. Graphic designer, your social media manager, those are all examples. All right, this is the really, the next thing I'm going to say is a really important part to understand, which is where I think all the confusion is at. You only issue them for direct payments, which is a cash, a checker, an ACH generally. you do not issue a 1099 for payments you make to them via a payment processor like Stripe or Paypal. Stripe or Paypal will issue them their own separate 1099. 1099 is called a 1099K. In fact, just last week, I got a notification from Stripe that says, "Hey, your 2023, 1099K is available in your dashboard." So you do not issue 1099 payments for anything you pay via credit card, debit card, Stripe, or PayPal. And in today's world, where electronic transactions are everywhere, you're going to find for a lot of you in this particular service space that are working in the online space, that's going to eliminate a lot of your payments. If you were somebody who carried inventory, say a book shop or a retail shop, you're probably going to have more 1099s because you're probably going to be paying more maybe with checks or ACH. But a lot of us, you know, a lot of my clients service business owners, they're working largely in an online space and they're doing a lot of work virtually. They're paying fees on their credit card, debit cards. So this is one of the things I really want you to understand. Again, I'm going to say it again, third party payment processors like Stripe or Paypal is in their own 1099 pennies. Do not issue a 1099 for payments made via credit card, debit card, Stripe or PayPal. 

Where another thing that I think creates a lot of the confusion is right now for 2023, the limit was that these third party payment processors only have to issue a 1099K if they've paid you $20,000 and more. That's the requirement. But there have been, but this is being lowered to $600. It's actually been talked about being lowered for years. It was implemented several years ago that they were going to lower for $20,000 to $6. But obviously, if I'm Stripe or PayPal, when you lower from 20,000 USD to 600 USD, the volume of 1099s, I'm going to have to issue is going to have dramatically improved. So they've been asking for multiple delays. So there have been numerous delays in this, and it's being phased in in 2023 and 2024. So as it rolls, they're going to be some people who aren't going to get any 1099.

So for example, if you paid a consultant $10K via Stripe, due to the deferral, the contractor may not get a 1099K because it's not over $20,000. If that was the same thing that you had paid via ACH, you would have to issue them at 1099. So I think this is where a lot of the confusion is people are saying, well, yeah, but, I didn't pay them enough so Stripe's not going to issue them at 1099. And so they're like, well, I must have to. No, if you paid them via credit card, debit card, Stripe, PayPal, do you not issue them at 1099? Couple specific cases I want to call out, people ask them, what about them? If you paid for a business expense via them, though, personal, which you shouldn't be doing, by the way, then you need to do a 1099. But if you paid it on VIMEO as a goods or services, you market as a goods or service, then they will do it to VIMEO, well, issue the 1099.  So again, when you're paying anything for business, you should always be paying it as a goods or services. But I've heard of people or like, where they're paying somebody and they're like, well, I don't want to pay the fees to get, where they're paying somebody and that person that they're paying says, I don't want to pay the fees that VIMEO charges me if it's a goods or service. So pay me to me as a person, not one, you should be doing that. You should be doing that. There's ethical issues with that. And it's probably against their terms. But if you did, not knowing any better or whatever, then you would issue a 1099 for that because then it's basically a cash payment. ZAL is the other one that comes up. 

ZAL is not considered a payment processor. It’s basically just almost like a messaging service, a way of transferring money, but they're not considered a payment processor. So if you paid somebody via ZAL and it was for business expense, you would record a 1099K on that. So that is, should cover for you who gets a 1099 who doesn't. So then the question becomes, well, how do I ensure I'm issuing them to the right people? So the first thing you need to do is you need to request a W9. Sometimes, especially if we're small business owners, we're service business owners, sometimes you want, you may just, the payee may, the person who are paying may just say, well, yeah, I don't need to get a ton. I don't need you to send me a 1099K corporation. Understand that you are responsible as the payer to have documentation that substantiates whether or not they should be paid or not. In larger companies, this is something I wasn't really aware of, really until I got into the small business space because in larger companies, it is a normal best practice that vendors want to even be set up, let alone paid. And this includes the Amazon's and the general metrics of the world. They will not even pay them until they are issued, they went until they received a 1099. So W9 is a form that you can get from the IRS. I'll put the link for this form in the show notes. It's an IRS form and you basically fill out information about your company I'll see or your corporation provide your EIN or your social security number if you don't have an EIN. And it goes to the company who's paying the funds and they enter this into their system and they use this to support, that if they're not issuing a 1099 because they're a corporate entity, they've got this form that was given to them. This is that company is a corporation. So they're not necessarily. I encourage you not to just take the words from your vendors or for your service providers that they're a corporation, get the W9. So keep track of how you're paying them also credit card paypal cash. If you set things up properly and QBO, this will hand out for you because QBO does allow you, it gives you the ability to process 1099s right within the system. But in order to do that, you need to be able to be tracking. There's a payment method field in QBO and you need to be able to track that, credit card paypal cash. If you are using a spreadsheet, when you make a payment, you'll want to track that. 

And again, systems like QBO do make this easier. You can invite vendors to submit your W9 electronically. You can, if they send your W9, you can attach it into the file. There's in your vendor setup file is where you'll enter on your information and in QBO, there's a little thing that says track for 1099s. So anybody who's a service provider and who is not a corporation, you just check that 1099 box. And then you can't the other year, you can process your 1099s. If you're not on QBO, there's, there's, if you go out and search, five by 1099s out on Google, you'll find, several websites where you can just go in, you can use them to process your 1099s. 

And so now let's go to the opposite end. And let's talk about what if I get a request for a W9? So you're a service provider. So you provide services to people. If you are a business to business, so if most of your clients are businesses, you're probably going to get requests for W9s. You're probably going to get 1099s if anybody's paying you VACH. But if you are, I'm going to use an example weight loss coach. If you are a weight loss coach, they are probably hiring you for personal purposes. They're probably not deducting it into their business. So you're probably not going to get a 1099 or W9 because they don't have to issue one for personal services. But if you were a business coach, they're probably deducting that as a business expense. So you're probably going to get a request for a W9. So what I do if that happens. So if you were a contractor, freelancer or a service provider. I'm going to ask you for a W9. The proper thing to do is provide it to them. There is a lot of hesitation. I'm finding out now because people realize that there's a lot of confusion about 1099s. If you're somebody who knows because you know now that you shouldn't get a 1099, if they paid you via credit card, somebody sends you a W9. There's a lot of hesitation to issue them the W9 because they're afraid their person doesn't understand and they're going to issue a 1099 that you shouldn't get. If that's the case, please send this podcast to them. And explain the rules. But don't just say I'm not going to provide it because if you're supposed to get a 1099 and you don't provide your W9, they're still required to issue a 1099 and in the field they put, basically refused. In the EIN field, they refuse and then that triggers the IRS to go out and try and find you and you just don't want to do that. So if you get a W9, you don't want to provide it or you know you're not supposed to get a 1099 for that client, have that discussion with them. And even if your corporation is appropriate to issue it, because like I said, it's their responsibility. Keep in mind that when they're asking you for the W9, it's their responsibility to keep documentation on file. 

Something that I've seen also come up is from sole proprietors. Most solo propeitor  do not need to have an EIN. EIN is an employer identification number. You have to have it in certain circumstances in one of which is if you have paid employees. If you're a sole proprietor and you're sole proprietor, you typically do not need to have an employer identification number. You're a player identification number. You're a social security number. And so I've seen some people say why don't I want to say my W9 because I've got my social security number on it. Well, folks, you need to go get an EIN because if they paid you, VACH cash or credit cards, you have to provide them that W9.  if you've never paid you everything via credit card, I mean, and you want to have that discussion with them. Again, I coming from the larger, and might say large, I mean, even 5 million at higher, it's very standard that if you don't want to give me a W9, then fine, I don't do business with you. But if if they should issue a W9 to you or a 1090, and you don't have any EIN, you still need to provide them that W9 with your social security number. Be aware that if you do, if you are a sole proprietor, you can put in a request for an EIN number. There is a IRS tax form, you can file to request an EIN, obviously it's not an overnight thing, but if you have hesitation about providing your social security number, and you can go out and apply for an EIN. What to do if you get a 1099 that you think is an error? Contact the payer. So let's just say you provided that W9, but they sent you a 1099, and you know they paid you via credit card. Contact the payer and ask for a corrected form. They file a corrected 1090, and explain the rules to them. If that doesn't work, consult your tax professional, they'll know what to do. And best practices. I've mentioned this a little bit. Collect your W9 up front for new service providers or contractors. I have a client right now that took over this year. We don't have on file complete W9s. I basically went through and determined who I know we need to issue them to. People basically, what I first did was who did we, who we paid one or more payments for a via ACH cash or check. That's the first thing I did. Then I said, okay, which of these are over 600 USD in total. And then those that went out got W9s for. But as we move forward, which brings on new vendors, we will request the W9 up front. So, collect your W9s up front for your new service providers or contractors. Keep accurate payment records, including how you made the payments. So, for instance, what if I did both? Let's say I paid a contractor 20k. Maybe 15k was maybe a recurring fee. So maybe I was paying 5,000 a month for three for three months. And I put that on a credit card, but maybe my initial payment was a kind of deposit. And I paid that via a check. You would issue a 1099 for the 5k if they're not a corporation. But you would not issue it on the 15k. And it applies for people who are paying you. If they're paying partially via ACH and partially via credit card, they still issue you a 1099 for the ACH portion. And use QBO to help you track your vendor payments and follow your 1099s. And that wraps up this week's episode. 

If you're sitting here thinking, whoa, I don't want to part of this. I want to hand this off to someone for 2024. Well, all my bookkeeping services include 1099 preparation. And I will, if I'm doing bookkeeping services for you, I will walk you and hold your hand through all of this. In most cases, handle all of it myself. The only thing I may get assistance from is tracking down to OB9s where necessary. And if you are ready for expert accounting help, I would love to have a further conversation with you. You can reach out to me at www.carlamoats.com/workwithme. And check your show notes for links to the resources mentioned in this podcast. And then I will see you next week. 

Thanks so much for listening to the show. Remember that your finances deserve some love. Finance doesn't have to be complicated or overwhelming and you do not have to do it alone. I'd love to talk to you about your business, so please come on over to www.carlamoats.com to learn more. Or if you're ready for financial and strategy support that will uplevel your business, go to www.carlamoats.com/workwithme to book your free financial assessment. And the last favor I'll ask is for you to help me get out the word. Tell your friends about this podcast and share it on your favorite social media. Until next week, go create some Purposeful Profit.