Editor’s note: This blog was updated on December 28, 2022
Update: Since this content was published, the IRS released guidance that the implementation of the reduced $600 threshold for 1099-K reporting will be delayed until tax year 2023. As a result, the federal threshold for the 1099-K form reporting for tax year 2022 will remain unchanged at $20,000 AND 200 transactions. Read our recent blog post for additional details on this federal change as well as state 1099-K reporting implications.
If you use a payment app or other payment service provider to facilitate your business payments, do not assume that they will take care of issuing the 1099s to your vendors or payees. In fact, the law requires your business to issue the 1099s and only shifts that responsibility to another party in very specific circumstances.
And, since the penalties for failing to issue and file accurate and timely returns increased again, it is important that you confirm exactly who is issuing the 1099s for your business payments for the 2022 season.
All businesses are required to issue 1099s to nonemployees for business payments
The tax law has long required businesses, tax exempt entities and government agencies to issue an information return when they make payments in the ordinary course of their trade or business when those payments aggregate to at least $600 or more during the calendar year.
To facilitate tax administration, the Department of the Treasury has issued numerous regulations that prescribe the different W-2s, 1099s and other information returns that businesses must use to fulfill these reporting requirements.
For payments of goods and services to U.S. nonemployee payees, businesses are generally required to report one of the following 1099 returns:
- Form 1099-MISC Miscellaneous Information
- Reports payments of $600 or more of rents, royalties, good and services, and gross proceeds paid to attorneys.
- Goods and services: medical and healthcare service provider payments, proceeds from fishing boat enterprises, crop proceeds, etc.
- Form 1099-NEC Nonemployee Compensation
- Reports goods and services payments of $600 or more paid to nonemployees.
- Fees paid to service providers like accountants, lawyers, contractors, commissions, taxable fringe benefits paid to nonemployees, etc.
- Form 1099-K Payment Card and Third-Party Network Transactions
- Reports all payment card transactions.
- Reports goods and services payments of $600 or more paid via third-party payment networks by third-party settlement organizations (TPSOs).
Known as the “tie-breaker rule,” if the payment transactions qualify for Form 1099-MISC or NEC reporting and also qualify for Form 1099-K reporting, then Form 1099-K is issued instead.
How will you know if the online platform is a TPSO operating a third-party payment network?
Your business is required to issue 1099s for the payments it is obligated to make to nonemployees – even when your business doesn’t actually make those payments directly to the payee. Determining the type of 1099 form to issue requires an analysis of the details of the payment transaction including how the payment was made, who made the payment, and more.
When your business utilizes traditional payment methods, such as issuing checks or using your bank automated clearing house (ACH) or wire services, your business is generally obligated to issue Form 1099-MISC or NEC depending on the goods and services transactions.
When your business utilizes payment cards like credit cards and debit cards for payments to U.S. payees, the company that processes the card transactions and actually transfers the USD to the merchant account will issue a 1099-K to the payee. This means that your business should not issue 1099 forms for business payments to nonemployees where a payment card was used.
When your business utilizes online payment platforms to facilitate business payments, it’s important to confirm who is going to be issuing the 1099s. There are many companies that offer technology to assist with settling payments but that does not mean that they are obligated to issue 1099 forms for your company.
ACH payment networks are not required to issue 1099-Ks–so your company may need to issue the 1099 instead
Automated clearing house networks are not third-party payment networks for purposes of 1099-K reporting. The tax law is specific in the definition of a third-party payment network and the criteria includes contractual agreements between the sellers and the payment platform that contain guarantees and permissions that are not generally contained in ACH network agreements.
As a result, the Treasury regulations § 1.6050W-1 have generally exempted ACH payment networks from the 1099-K reporting requirement.
Since the ACH network will not be reporting a 1099-K to the payees, your company is obligated to report the applicable 1099 form for those transactions.
Take Action
Still have questions about issuing 1099-Ks? Reach out to the Sovos team to learn more.
