What is this 1099 law and am I being double taxed??
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Ok, so this is going around again in the groups and I’ve been trying to help where I can, but there are a LOT of groups and a LOT of comments and a LOT of misunderstandings. So, let’s put what I know into a shareable format, right?
Help me help others!
First, this isn’t new.
1099s are numerous and are only a matching tool. That is, a company will send a 1099 to the IRS and the IRS will match it up with the taxpayer to ensure they are properly reporting their income.
As I said, there are many kinds of 1099s and you can see the list here from NOLO. The thresholds to complete a 1099 are different for each. A 1099-K, for Merchant Card and Third Party Network Payments are what companies like PayPal and ETSY will file. If you have an interest accruing bank account, you probably have received a 1099-INT for Interest Income. A 1099-H is for Health Coverage Tax Credit Advance Payments. A 1099-MISC is for Miscellaneous Income, that is, income that doesn’t specifically fit elsewhere.
For the 1099-K, the threshold used to be 200 transactions AND $20,000 processed through the company. The change that everyone is learning about is that the threshold is now $600 flat (like the 1099-MISC has always been). Note: Some states have it set as low as $400. I personally have had to file these 1099s in the past and it really isn’t terrible. You can see the requirements of filing a 1099 if paid a certain amount from or to a single person here from IRS.
So this change is actually that the payment processors now have more paperwork to do because of the lower threshold AND the IRS gave themselves more work sifting through more 1099s to match up. Why? Most likely because of issues with people not understanding their reporting requirements or actually trying to get out of it (sad, but true).
Now, let’s talk about our responsibilities as someone who may receive a 1099.
If you are not a business,
your income includes any W2 jobs, resale at a profit, and other income from other sources. Each type of income has a specific place on your 1040 (most of the forms are called “Schedules”). Additionally, each type of expense and credit (child, school, interest, etc.) has a specific place on your 1040 (also typically called a Schedule). These work together to find what your actual tax responsibility is.
For things that are resold, your taxable amount is only the profit amount. So if you purchased a $1000 couch and sold it for $600, it’s not taxable. If you purchased that $1000 couch and sold it for $1500, then $500 is taxable (and will go on a Schedule D for Capital Gains/Losses). You may not necessarily *pay* taxes on it, though. Remember that your entire income and expense/credit gets considered together.
If you are simply paying a friend back for something, keep detailed records of that. Like, when you send it as "friends and family" add the note that says "hey, thanks for covering dinner!" or "our portion of the vacation rental". By technicalities, yes, that paying a friend back for dinner is “income” to them, BUT that doesn’t necessarily mean it is taxable. You need to be able to show how it is not a taxable transaction (if audited, another reason for personal vs business accounts). As a note here, currently Zelle and CashApp are not payment processors, they are transfer facilitators. These companies are intended specifically for this situation and are not subject to this law update.
If you receive a 1099 form, you are not being taxed again. It is only a matching tool to make sure that you are properly reporting. If your stated income is less than what is on that 1099 plus the W2 (if you have that), then you may be flagged for an audit to show why you reported under what information the IRS received.
If you are a business,
keep your personal transactions separate from your business transactions, including having a separate bank account for your business. Maintaining this separation will make audits significantly easier.
When reporting, you will use the Schedule C (remember I said nearly all the forms are Schedules). This will have you report your business’s gross income, then all allowed expenses, then inventory, and will calculate your business’ profit or loss.
If you profit $400 or more, then you will be instructed to fill out the Schedule SE. This is for Self Employment. On this form, you will do a dance and a twirl to figure out if you owe any self employment taxes. If you do, this amount will be put on your 1040 and considered with the rest of the 1040’s income and expenses/credits which means, you still may not actually pay anything at the end of the day. It just reduces that refund you get. (Though, if you do owe, *congratulations*! That means your business is doing well!)
At the end of the day
The 1099 reporting is nothing to bat an eye at. It’s only a matching tool for the IRS to make sure everyone is reporting the bare minimum they are supposed to be reporting. File your income & expenses, and tuck that 1099 away in your records.
*Please note that this is for information purposes only. This does not indicate that I agree with these laws. This is not to be taken as legal advice.