What's The Deal With $600 and 1099's?

A common tax myth that I have heard is “If I earn less than $600 I don’t have to claim that as income, correct?”

That is false unfortunately. The IRS requires that you report ALL income ($100, legal, illegal, etc. After all, that’s how the Government put Al Capone in jail… he wasn’t reporting his income from illegal sources and they nailed him on tax evasion.)

So where does the $600 figure come from that fuels this myth?

Well, the $600 is the threshold where if a business pays a nonemployee worker $600 or more during the calendar year, then the business should issue Form 1099-NEC, Nonemployee Compensation, to the worker no later than January 31 of the following year.

This used to be through the 1099-Misc but the 1099-NEC has come back into usage (last used in the mid 80’s).

Because this is a new change, there are likely going to be many Forms 1099-NEC that are issued that are either not required or have incorrect amounts reported. 

And while it may seem harmless to provide more information than less by inadvertently issuing 1099’s that didn’t need to be issued, there could be negative consequences for doing so.

Sure, there are penalties for not issuing a 1099 so what’s the harm in issuing a 1099 that may not have been necessary.

Well, here are some factors to consider that could have negative impact:

1. The IRS receives millions of information returns that it is not required to receive, and this is a burden on overall tax administration.
2. Recipients of information reporting forms are more likely to receive erroneous IRS notices or inquiries into their tax return.
3. Tax practitioner time during peak season is wasted on preparing unnecessary forms.
4. You end up paying for unnecessary tax reporting.

Business owners should absolutely make receipt of a Form W-9, Request for Taxpayer Identification Number and Certification, a requirement prior to issuing payment to a worker. 

This protects both the you and your tax preparer when making information return reporting decisions.

Here are 4 best practices I encourage you to adopt when preparing Forms 1099-NEC over the next few weeks.

Best Practice # 1: Do not issue a Form 1099-NEC to a corporation or a limited liability company (LLC) taxed as a corporation.

It is not required to issue a Form 1099-NEC for payments to a corporation; however, payments for attorney’s fees and certain medical services must still be reported. See Treas. Reg. §1.6041-1(p)(1).

Best Practice #2: Do not issue a Form 1099-NEC when a payment is made via credit card, PayPal, or other third party networks.

These payments are reported by the payment settlement entity on Form 1099-K; therefore, issuing a Form 1099-NEC for the same payment leads to double reporting of the same income. It does not matter whether the worker has sufficient transactions to receive a Form 1099-K from the payment settlement entity. See Treas. Reg. §1.6041A-1(d)(4)(i).

The above regulation has the following example:

Service-recipient A, in the course of its business, pays remuneration of $600 to service provider B by credit card for services performed by B. B is one of a network of unrelated persons that has agreed to accept A's credit card as payment under an agreement that provides standards and mechanisms for settling the transactions between a merchant acquiring bank and the persons who accept the cards. Merchant acquiring bank Y is responsible for making the payment to B. Under paragraph (d)(4)(i) of this section, A is not required to file an information return under section 6041A(a) with respect to the transaction because Y, as the payment settlement entity for the payment card transaction, is required to file an information return under section 6050W.

This will be especially important for tax year 2022 information reporting, as the Form 1099-K reporting threshold is now reduced to $600 due to changes from the American Rescue Plan Act.

Best Practice #3: Do not issue a Form 1099-NEC to a tax-exempt organization.

If the organization is tax-exempt under §501(a), then no Form 1099-NEC needs to be issued to it for services provided. See Treas. Reg. §1.6041-1(p)(2).

Best Practice #4: Do not issue a Form 1099-NEC that includes the value of expenses reimbursed to the worker under an accountable reimbursement plan.

If a worker provides receipts and gets reimbursed for a business expense, then the reimbursement amount is not reported on Form 1099-NEC. If a worker receives a payment for expenses without substantiation, then it is generally included on Form 1099-NEC. See Treas. Reg. §1.6041-1(h)(1).

Taxes are complicated and it’s easy to get things wrong.

Hopefully this has been helpful to you as you wrap up last year and move forward into the new year!

The US tax system is exactly that: A system.
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Why? Because the CPA, as awesome as they may be, don’t have the time to keep up with all the loopholes and methods to reduce their clients taxes.

And the traditional CPA does not have the time needed to spend with their clients to show them how to properly execute those tax strategies.

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