1099-K and 1099-NEC Overlap

Many contractors have problems with clients issuing a 1099-NEC when the payments also get reported on a 1099-K. You may need to know:

  • How to file your taxes if your income gets double reported.
  • How to respond to the IRS if they think you didn’t report all of your income.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

What’s the problem?

You do work as an independent contractor. Your client uses an online payment service.

At the end of the year, your client issues a 1099-NEC. The payment processor also issues a 1099-K. Both forms show the same income. The IRS thinks you made twice as much as you did.

Why does this happen?

The old rule was that your client issued a 1099-NEC (formerly called 1099-MISC) if you made more than $600 in a year. A lot of people weren’t reporting their income if they made less than $600 or sold to someone who didn’t have to issue a 1099.

In order to reduce unreported income, the IRS added a form for online payment services like PayPal, Square, and Stripe. They have to issue a 1099-K showing the total payments you received in a year.

The IRS also changed the instructions for Form 1099-NEC. The client should not include income paid through a payment service that has to issue a 1099-K.

Many clients decide to ignore the IRS instructions and keep issuing Form 1099-NEC. This is often because their accountants get paid per 1099-NEC and scare them into filing unneeded forms.

What do the different tax forms mean?

To understand how income gets double reported, it’s important to understand each tax form involved.

What is Form 1099-MISC?

Form 1099-MISC is titled Miscellaneous income. It was previously used to report non-W2 earnings paid to independent contractors through the 2020 tax year. These payments now go on Form 1099-NEC.

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 stands for Non Employee Compensation. Since the 2021 tax year, businesses use it to report payments made to independent contractors who earn $600 or more in a year.

Businesses should only issue Form 1099-NEC for payments that don’t go through a payment processor that issues Form 1099-K. This might include cash, check, or direct deposit.

What is Form 1099-K?

Form 1099-K is a form certain payment processors use to report payments you receive. The payments could be independent contractor sales, sales of merchandise, or any other type of transaction.

Starting in 2022, a payment processor 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, say that a 1099-NEC 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 PayPal, a popular third-party payment network and 1099-K reporter to make the payments.

Some companies correctly interpret the Instructions for Form 1099-NEC as meaning they should not file a 1099-NEC. 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. You’ll need to send a written explanation that your income was double reported. It can also be helpful to include supporting documentation such as transaction statements from the 1099-K payment processor showing payments with the same company name as on the 1099-NEC.

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 double-reported income 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.

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