Why do you not send Form 1099-NEC to independent contractors who were paid electronically? (PayPal, Venmo, Cash App)

[ColeenD3 · Accepted solution]

What is Form 1099-NEC? Who receives Form 1099-NEC?

Starting in tax year 2020, 1099-NEC (non-employee compensation) will be issued to self-employed individuals, like independent contractors, freelancers, or side-giggers who have been paid $600 or more. Wages might not trigger a 1099-NEC if they are under $600, but you are still responsible for reporting all income whether a 1099-NEC was received or not. As a self-employed person, you are required to report your self-employment income if your net earnings from self-employment are $400 or more.

In this situation, the process of filing your taxes is a little different than a taxpayer who only receives regular employment income reported on a W-2. When you receive a 1099-NEC reporting your income, you can claim deductions against that income on a Schedule C, lowering your taxable income from self-employment. 

Luckily, you don’t have to know about form Schedule C: TurboTax Self-Employed will ask you simple questions about you and your business, and fill it out for you based on your answers so that it is effortless!

What is Form 1099-K? Who receives a 1099-K?

Form 1099-K, also called Payment Card and Third Party Network Transactions, is used by credit card companies and third-party processors like PayPal and Amazon to report the payment transactions they process for retailers or other third parties. You’ll receive a 1099-K if you accepted credit cards, debit cards or prepaid cards and had over $20,000 in sales and more than 200 individual transactions through a third party processor. It reports the gross amount of the transactions, which means if you’re a Uber or Lyft driver, your fees, commissions, safe rider fees or phone rental payments are not deducted. You can deduct those as part of your business expenses along with the mileage you drove.

Your ride-share operator, or other on-demand economy partner, should provide you a tax summary you can use to translate the 1099-K information into some of the income and expenses to report when you file your self-employment taxes.

Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.

[rjdido]

I am working on my daughter's 2021 tax return using the Turbo Tax Deluxe version.  During 2021, after her unemployment ran out, she worked part-time for a small private business as a non-employee.  Her wages were reported on a 1099-NEC but she was not an independent contractor or operated as a personal business.  No federal or state taxes were withheld on those wages.  How do I report those wages since she does not have her own business?

[DianeW777]

A nonemployee is an independent contractor for all intents and purposes.  This means that she worked as her own business essentially and was not an employee of any business based on the reporting form and as you stated a 'nonemployee'.

The tax law is clear on two things:

1. Independent Contractor (defined)
2. Employees

If your daughter believes she should have been an employee she can argue that with the IRS and report her income on a substitute W-2 (Form 4852) which can be completed in TurboTax. 

The Form SS-8 helps to differentiate between an employee and an independent contractor (self-employed). Take the time to review this form and decide if you have an employer/employee relationship.  If the person in charge tells you when to be there, how to do your work and provides all the equipment necessary to do your work then it's quite likely this is an employer.

• Instructions for Form SS-8
• What is Form 8919? (To be used if you want to file as an employee, you will need all of your income information) 

You are allowed to report the income as an employee if you believe that is the relationship you have, however, this will not go well with your employer.  The IRS will go after them for payroll taxes which could mean penalties.

You can also continue to report your earnings as a self-employed independent contractor.  To file like this you will need to use TurboTax Online Self-employed or TurboTax CD/Download Basic.  The business name would be your name, the business address would be your address and the business code can be selected or you can use 999999, if you are not sure.

• Where do I report Schedule C income?

[rjdido]

Dear Diane,

Thank you for your response.  My daughter's employer is a single-person business owner who doesn't consider herself big enough to carry part-time workers as employees.  If my daughter files as an independent contractor even though she doesn't have a business, will she be required to pay more than the federal and state income taxes that were not withheld?  That meaning social security, medicare, TDI, or other expenses that actual companies have to pay.

[VolvoGirl]

Only the FICA which is Social Security & Medicare in addition to any regular income tax on it.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

[rjdido]

Dear VolvoGirl,

Thanks for the response.  My daughter will soon be working as an employee with a different company so this problem will be solved.  Does filing as an independent contractor for 2021 require any "dissolution" of a personal business that really didn't exist in the first place?

[VolvoGirl]

No.  For 2021 just file it on Schedule C.  It is a disregarded business entity and is included in your personal return.  

[rjdido]

Dear VolvoGirl,

Thanks, you have pretty much answered my question.  Would it have been better for her wages to be reported on a 1099-MISC form rather than the 1099-NEC?  Does the MISC form more accurately report wages that were paid without taxes withheld?

[VolvoGirl]

No.  It should be a 1099NEC.  A couple years ago they split off the 1099Misc box 7 to the new 1099NEC box 1.  

[rjdido]

Gotcha.  Thank you for your time and valuable information.  You have been very helpful.