@Jennifer_McCarroll ,
You are correct. The overall substance of @AmyC 's response is wrong. However, see below for an interesting and messy nuance, and a couple of follow-ups:
1. @AmyC assumed in her reply to me that I issued the 1099-NEC forms for my client last year (i.e., 2020's 1099-NECs) but I did not work for this client at that time. The client issued the forms.
2. @AmyC said, "I would rather send a form than find out later that I should have and pay the penalties."
But you don't send a tax form "just in case." You send a form because the law says to do so. The law does not say to do so, as you correctly concluded, when it comes to third-party payment network transactions.
3. The references you cite above are authoritative, correct and relevant. You did us all a great service to put up your post. Thank you!
4. HOWEVER, here is the one messy, confusing nuance:
Although the other 4 CPAs who I was talking to about this all agree that the prior year posts were correct and @AmyC's post is misleading, the nuance is:
After further research, I found that PayPal's site distinguishes each payment as either "Friends and Family," or as "Goods and Services," which I confirmed with the client. [I don't use PayPal].
Apparently -at least as far as we can figure out - PayPal only issues 1099Ks for Goods and Services payments not for Friends and Family payments.
This makes sense if you think about a friend reimbursing another friend for a theater ticket through PayPal: that should be Friends & Family and obviously would not be subject to tax reporting anywhere.
THEREFORE, we are going ahead and issuing 1099-NEC forms for my client for the year 2021 because the payments were not flagged properly as "Goods and Services." So we concluded this is the correct thing to do in substance because....
I confirmed with a vendor from 2020 who was paid > $20,000 in 2020 [$20k = the PayPal threshold up until 2022 when it drops to $600] that the vendor did NOT receive a 1099K from PayPal for 2020 even though the vendor was over the threshold.
We think the vendor did not receive a 1099K because of how the payments were accidentally flagged. But the vendor DID receive the 1099-NEC for 2020, so all was well, even though the letter of the law as you properly cited above, was not followed.
Therefore, we ARE issuing 1099-NEC forms to the vendors again for 2021 because we know that the income will NOT be duplicated in reporting to the IRS. That is the key! You can't issue a 1099-NEC to vendors if PayPal is also going to issue a 1099-K because the vendor will show up with too much income in the IRS records.
From PayPal's site:
If you’re sending a payment, payment types include:
- Sending to a friend and family - used when sending money or a gift card to a friend or family member. Before you complete a payment, you can opt to pay the fee, or pass it onto the recipient by changing it to a Goods or Services payment, to be covered by PayPal Purchase Protection.
- Paying for goods or service - used when buying an item or service from someone. When you make a purchase, the seller pays a small fee to receive your money. Your payment is covered by our protection policy automatically.
