Form 1099-MISC Q&A

1. I thought the rules requiring landlords to issue 1099s were repealed. So, why are there two questions on Schedule E about 1099s?

Those rules were repealed under H.R. 4 (P.L. 112-9) and made retroactive, as if they had never been enacted. Therefore, landlords, in the ordinary situation of renting out a house or two, do not have to issue 1099s to service providers. In that situation, you would answer “no” to the first question, “Did you make any payments in 2011 that would require you to file Form(s) 1099?” The second question (“If yes …”) can be left blank.

There are still situations where a Schedule E filer would have to issue 1099s. In general, you would have to file 1099s if you materially participate (nonpassive) in the activity. For example, if you are a real estate professional and treat the rental activities as nonpassive, you are in a trade or business and you must issue 1099s.

2. Are all business that process credit cards and electronic payments required to send a 1099-K to sellers when they have more than 200 transactions and $20,000 gross income?

No. The $20,000 and 200 transactions threshold applies to “third-party payment networks” (such as PayPal and Amazon). There is no threshold for a “merchant acquiring entity” — credit cards, debit cards, or any other card accepted as payment by a network of persons unrelated to the issuer. As such, a 1099-K is issued by a credit card company for even one transaction of any amount.

3. I accept credit cards in my practice. Do my clients have to issue me 1099-Ks?

No. The credit card company issues the 1099-K to you.

4. So, does my client have to issue me a 1099-MISC?

Generally, the rules on 1099-MISC have not changed. If your client had to issue you 1099s in the past they still do, UNLESS they pay you with a credit card (in which case the credit card company will issue you a 1099-K that will cover the payment). To avoid double reporting, payments by credit cards are not included in a 1099-MISC.

5. What if a business client makes some payments to me by check and some by credit card?

Let’s say the client makes two payments to you — one by credit card for $800 and one by check for $700. The $800 will be included in the 1099-K and the client will need to issue you a 1099-MISC for $700.

6. What if you change the facts of question 5 to say that the cash payment was only $300? Does he still have to issue a 1099-MISC because his total payments to me were over $600 ($800 + $300), or not because the total 1099-MISC payments were under $600?

Neither the regulations nor the instructions to the forms answer this question. It would seem that the safe answer would be to issue the 1099-MISC for $300.

7. What about ACH debit payments? Is a 1099-K required? They do go through a third-party payer.

Generally, no.

8. I run a beauty shop and have hairdressers who are independent contractors. They have to pay me a space rental fee. Their customers often pay by credit card, which runs through my merchant account. I pay them by check after deducting the space rental and other charges. Do I have to issue them a 1099-K?

Yes. The regulations talk about “aggregated payees.” (Treas. Regs. §1.6050W-1(d)(1) and instructions to Form 1099-K) An aggregated payee situation exists when a person receives payments from a payment settlement entity on behalf of one or more participating payees and distributes the payments to one or more participating payees. In this case, you are one participating payee and your hairdresser is another.

Therefore, you, the account owner, would receive a 1099-K from the credit card company and you would be obligated to issue a 1099-K to the hairdresser. Example 21 of the regulations uses the example of an independently-owned franchise store in which a single corporation receives payments for credit card sales and allocates them to the franchise stores. The single corporation gets a 1099-K from the credit card company and must issue 1099-Ks to the franchise stores. Another example is that of cab drivers who are independent contractors and accept credit cards that run through the cab company’s merchant account.

Comment
In the above situations, if the hairdresser and cab driver were employees, they would not receive 1099-Ks because they are not aggregated payees. The cab company, for example, would receive and have full rights to the payments. The cab driver’s income would be reported on a W-2.

9. With regard to question 8, the hairdresser charged $2,000 to customers through credit cards but after deducting space rental and other charges I’m issuing her a check for $1,500. How much goes on the 1099-K that I issue to her?

$2,000. The regulations make it clear that you report the gross amount. The hairdresser is responsible for reporting the full amount and may take deductions for allowable business expenses.

 

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

Tags: Form 1099, Independent Contractor