What to Do About Income Double Reported on 1099-MISC/NEC and 1099-K

Since the introduction of IRS Form 1099-K, there has been a lot of confusion over whether those payments should also be reported on Form 1099-NEC or Form 1099-MISC and what to do about income double reported on these forms. The most common scenario is a client sends payments via a 1099-K issuer but still files a 1099-NEC. The short answer is that your taxes should not be affected, but be prepared to deal with possible complications.

What is Form 1099-MISC?

Form 1099-MISC is titled Miscellaneous income and was commonly used to report non-W2 earnings paid to independent contractors through the 2020 tax year. If a company paid $600 or more to an individual, they usually needed to file a 1099-MISC.

What is Form 1099-NEC?

Form 1099-NEC replaced form 1099-MISC for business payments for tax year 2021. Since 1099-MISC covers several different types of payments and independent contractor income is becoming more common, the IRS wanted to split off payments to independent contractors into a separate form.

What is Form 1099-K?

Form 1099-K was created to close a tax reporting gap that independent contractors and small businesses had exploited. Instead of being filed by the party paying the contractor, the form is filed by the payment processor itself.

Starting in 2022, a payment process must issue a 1099-K when someone receives more than $600 in payments.

Through tax year 2021, Form 1099-K was required in two circumstances.

  • For any transactions using a payment card (e.g., credit card), payment card account number, or any other identifying data associated with a payment card
  • For transactions completed through a third party payment network (e.g., PayPal) where the receiver has 200 or more transactions and $20,000 in payments received during the year.

What’s the confusion?

The IRS instructions for Form 1099-NEC, and previously 1099-MISC as well, say that a 1099-MISC should not be filed when payments are made via a method that’s reportable on Form 1099-K. Take this example:

An independent contractor receives $10,000 from a single company during the course of the year. The company uses Square, a popular third party payment network to make the payments.

Some companies correctly interpret the Instructions for Form 1099-NEC as meaning they should not file a 1099-NEC in this situation. Other companies incorrectly maintain that they are still obligated to issue a 1099-NEC. Still others are simply unaware of the changes.

The problem for the contractor if the income ends up on both forms is that the IRS might think they made $20,000 instead of $10,000.

What happens if you receive a 1099-NEC and 1099-K for the same income?

In theory, nothing should happen. The income should only be reported once on Schedule C or the other appropriate form, and the taxpayer should only be taxed on the amount that was actually received.

The problem is that the IRS uses a computer system to match the forms it receives against the returns filed by taxpayers. Some independent contractors have reported that they received both forms, properly only reported the income once, and then received a CP2000 notice claiming they understated their income because they didn’t report either the 1099-NEC or 1099-K.

Keeping with the $10,000 example from above and using a very simplified tax rate of 25%, say that the contractor received a 1099-NEC from their company and a 1099-K from PayPal. The contractor paid $2,500 in taxes on the $10,000 from the 1099-NEC. Their balance should be zero, but the IRS computer thinks the 1099-K was an additional, unreported $10,000 and sends a bill for another $2,500.

When the IRS sends the bill, it will contain information on how to appeal the finding that you owe additional tax. As long as you’ve kept good records, you should be able to quickly have the additional taxes reversed.

Is there a way to avoid double taxes if you receive both 1099-NEC and 1099-K?

Unfortunately, there is no certain way to avoid receiving a bill from the IRS for double-reported income. The IRS computers should already recognize that the income is from the same source. Any notices that are sent are due to shortfalls in the IRS system. The only thing to do is to ensure your return is accurate and your records are complete so that any audit or appeal can be swiftly resolved in your favor.

You can also try to educate your clients in advance that they shouldn’t issue you a 1099-NEC if they pay you through a service that issues a 1099-K. Some will get it. Some won’t.

Finally, some people recommend including the double amount in gross income and then taking a deduction to offset the extra amount. However, this can create other problems when the deduction gets flagged. It may be better to just report your correct numbers, then let the IRS decide if they want to ask about double reported income.

Conclusion

You may have income double reported if you get a 1099-K but your client still gives you a 1099-NEC when they shouldn’t have. There’s a good chance you’ll get a letter from the IRS, but if you kept good records, it should be easy to explain that you filed your tax return correctly.