The new 1099 tax rule contractors should know
If you use Cash App, Venmo or any similar app to send or receive payments, you need to know about the new IRS rule regarding these apps and 1099-K forms. Wade and the panel get you up to speed on when the form is used, how to handle personal transactions, and what penalties you could face if you don’t report these transactions.
Topics we cover in this episode include:
- The new IRS 1099 rule
- How to report personal transactions on your taxes
- Which types of entities require 1099s?
- Consequences of not having proof of who you paid
- Penalties for not handling 1099s correctly
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
TRANSCRIPT
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re talking about the new 1099 tax rules contractors need to know, or maybe it’s tax rule. Well, Wade will tell us about that. Because here on the Contractor, Success Forum, we help you guys run a more profitable, successful business.
And who is here to help us figure this out? We have Stephen Brown, McDaniel-Whitley bonding and insurance agency. We also have Wade Carpenter, Carpenter and Company, CPAs. And I am Rob Williams author coming up of the Pumpkin Plan for Contractors, and IronGate Entrepreneurial. Support Systems.
So Stephen, have you heard the word that, that there’s a new 1099 law coming?
[00:00:51] Stephen Brown: I remember that song in the eighties by Toto called 1099. You remember? 1099, I’ve been waiting so long.
[00:00:59] Rob Williams: No.
[00:01:00] Stephen Brown: Okay. Well that’s all I know about it. Hey, 1099s–
[00:01:04] Rob Williams: 8675309 the only number–
[00:01:08] Stephen Brown: I mean, this is, I’m gonna go ahead and say it before you say it. This is exciting stuff. Hey, new tax law changes 1099. But here’s the thing, listeners, you are getting a billion dollars worth of incredible advice and information from our own Wade Carpenter. So Wade, thank you for this.
[00:01:27] Wade Carpenter: Well, you hadn’t heard what I gotta say yet.
[00:01:29] Stephen Brown: Okay. Well, I’m gonna be
[00:01:30] Wade Carpenter: Anyway.
[00:01:32] Rob Williams: –negatively rewarding things. The fact that we know about the negative is our reward.
[00:01:38] Wade Carpenter: Right. Well.
[00:01:39] Stephen Brown: Roll.
[00:01:39] Wade Carpenter: I guess before we started any of this yeah, I know probably a lot of contractors think we’re gonna be talking about the employee versus 1099 independent contractor thing, which is always– yeah, that’s what Rob was thinking.
[00:01:53] Stephen Brown: Guilty.
[00:01:54] Wade Carpenter: But you know, that’s not what this is about. This is more about the rules.
The New 1099 Rule
[00:01:58] Wade Carpenter: There was a brand new rule that was actually signed March 11th ’21 in the American Rescue Plan Act of ’21. Buried in that, in a small little paragraph in a miscellaneous section is this thing that basically says they’re changing the rules on third party payers.
There was basically a rule where if you had a credit card company or whatever, you had a $20,000 exclusion. So they didn’t have to give you a 1099-K to report that stuff. And I know we were talking before about credit cards, but so many contractors have been out there using these cash apps. Cash App, Venmo, PayPal even.
What it does is essentially says anybody that’s paid over 600 bucks is supposed to get a 1099-K. It’s one thing if you got somebody at church and you’re reimbursing somebody for something. That’s, that’s different if it’s a personal thing. But this is going to be something that a lot of people need to pay attention to.
[00:03:03] Rob Williams: You know, It’s interesting that you said that, Wade, because my impression, cause I get these notices from the little things like PayPal and I don’t even know, whatever these other services that take money online. I’ve had notices about it that there were gonna be changes and then I had to get an EIN number to one of them or something, so they didn’t withhold.
So I know they’ve got some changes there and that’s where I thought the changes were. So I guess it’s gonna be everywhere for us too. So this is a really interesting conversation that I did not know what it was, cause I’m getting all this miscellaneous information and notices from different places.
[00:03:40] Wade Carpenter: Right. If you send somebody, a gift of a thousand bucks, if it’s over that $600, you could be getting a type of 1099 that works reporting this as income to the IRS. And so there’s a lot of questions that a lot of people have.
What counts? I’ve mentioned Venmo, Cash App, PayPal, and there’s some others. They have to report these things, but if you are using like Zelle, they’re claiming they’re not a third party app. They’re using your bank to pay these other people. So.
[00:04:11] Rob Williams: Yep. I’ve had Zelle before and I actually have something Wise with international payments that I do that with. And it asks me these questions like, what is this for? And I have no idea what the implication of whether I answer this as a service, this is something. There are all these things on there and I have no idea what the implication of those questions are.
[00:04:34] Wade Carpenter: Maybe we can talk about in a little bit when you’re like sending international payment, because there are some rules about sending the equivalent of a 1099 to foreign persons too. But I don’t wanna go too deep in the weeds, but.
[00:04:47] Rob Williams: Interesting.
[00:04:47] Wade Carpenter: We’ve seen a lot of contractors using these cash apps and I know the whole question about whether you should be withholding and independent contractors come up, for as long as I’ve been in this business, but this is not the question. The question is whether you need to be giving them a 1099. And the rules do actually say if you pay somebody on a 1099, that would go through a 1099-K, you don’t have to give them a 1099.
[00:05:12] Rob Williams: You mean on a credit card? You said a 1099, is that what you mean?
[00:05:17] Wade Carpenter: Okay, so there’s a 1099-K, which is reporting these third party payments,
[00:05:22] Rob Williams: Oh.
[00:05:22] Wade Carpenter: And then you’ve got these 1099, it used to be the miscellaneous, and in 2020 they created this 1099-NEC. This non-employee compensation. Non-employee compensation is what they’re after. But it is probably going to catch a lot of these contractors that you know have not probably been reporting a lot of this stuff. So technically the rules do say if you paid somebody through your business and it’s going to be reported to them as a service, you don’t have to give them a 1099-NEC.
When do I have to send a 1099?
[00:05:54] Wade Carpenter: We’ll talk about some of the penalties on this in a little bit, but I’m not sure I would go through that if you’re gonna do a certain part of your business where you gotta go back and figure out what you paid on that. I would just report everything just to make sure you’re covered because there is a question on your tax return that says, did you file all these things?
[00:06:16] Rob Williams: What is a company? That is what I, in this definition of if you pay a company, it’s well I am Jane Doe and I am DBA International Services or something. Is that a company? Does an LLC count? Is it a corporation? I’ve heard different answers on this of when you don’t have to send the 1099.
[00:06:35] Wade Carpenter: We can get into the 1099 rules on that, but from the standpoint of the 1099-K, which is the third party payments–
[00:06:43] Rob Williams: okay. Yeah, we’re, so we’re talking about the 1099-K.
[00:06:45] Wade Carpenter: So let, yeah, let’s stick with that and then I would like to address that, but.
How to report personal transactions on your taxes
[00:06:48] Wade Carpenter: What the rules say is if you are paying somebody personal they don’t have to be a business. If an individual gets paid, that’s technically a business, whether they reported it or not. That’s what they’re trying to capture. All these, people that get paid on 1099s. They’re not paying in social security and Medicare, as well as the federal and state on those.
So the rules actually say that, it’s okay to reimburse somebody. It’s okay to give a gift or something like that as long as you’re not going beyond like the gift rules. But if you pay somebody that you know, say you sold something like a baseball card for a thousand bucks or something, and say you bought that baseball card for 500.
You got a gain on it. If they send you money for something, a personal item, and you lose money on it, then you don’t have to report it. But if you have a gain on it, you are technically supposed to report that on your taxes as income. And I guess we also have the issue where, you know, the third party pay payers possibly could be out there. If it’s over $600, they may just send you the 1099-K and it’s your responsibility to get it straight. So that’s where I think it’s gonna cause a lot of problems for a lot of people.
And what the rules say is, well, you gotta go get it straight with the third party payer, which I imagine they’re not gonna have time to deal with all these things. So, what I’m recommending for a lot of people is if you got something like this, probably report it on your tax return, but show an offsetting payment if it was a reimbursement for something. Does that make sense guys? I–
[00:08:24] Stephen Brown: Yeah, it does. You’ve gotta have a paper trail that backs up these 1099-Ks and shows, what they’re for and what they’re about. I can understand them tightening up this rule. And beside baseball card collectors have been getting away with this crap for years.
[00:08:40] Wade Carpenter: I just made something up.
[00:08:41] Stephen Brown: I’ve been outraged over it.
But seriously, you know, it makes perfect sense, wade.
[00:08:45] Rob Williams: Yeah, and I think it’s pretty clear to us when you you pay a subcontractor if it’s an individual to say, perform some work, build a deck or, build a fence or something like that. That’s pretty clear. It’s a job, a trade.
And then I always got a little bit confused, like when I would pay Georgia Pacific or International Paper or warehouse or these people. This is really a long time ago, so maybe it’s not that way anymore, but I didn’t do 1099s for these corporations. And our accounting system checked off which ones that had it. I didn’t make that decision. I don’t know how that was done.
[00:09:16] Wade Carpenter: Well, essentially, there’s a couple of different rules we need to probably talk about for the 1099s. And as I mentioned, mainly what we’re talking about now is you should be reporting on the 1099-NEC for services. That’s over $600.
[00:09:30] Rob Williams: That’s what we’re talking about. Okay. I didn’t know when, I was saying the extreme example, I knew the huge corporations, but when is somebody small enough to where it, this starts coming into play.
Which types of entities require 1099s?
[00:09:42] Wade Carpenter: This is what I tell a lot of contractors: you do have a responsibility to pay these things, and I’ll talk about the penalties in just a minute, but you need to ask them how they’re taxed and there’s a W-9 form. That’s what they’re for, is, find out how somebody is taxed, and then we make a decision whether we need to give a 1099 or not. That’s what the W-9 form is for. And if somebody is a sole proprietorship, a partnership, essentially they do have to give them a 1099 if they’re a corporation, C corporation, or an S corporation, they do not.
[00:10:14] Rob Williams: Okay.
[00:10:15] Wade Carpenter: Now, you notice I did not mention an LLC.
[00:10:18] Rob Williams: Yeah, that’s where I was confused. That was my big gray area.
[00:10:21] Wade Carpenter: Okay, so that is a gray area. And actually I was talking to a banker that didn’t know this, but you know, if you look at the W-9 form, it’s like, are you a sole proprietor, partnership, corporation, whatever, or are you an LLC? And if you say LLC, you gotta answer a different question that says, I’m an LLC, but I’m taxed as an individual, partnership, or a corporation, essentially. If the LLC is taxed as a corporation, you don’t have to, but if it’s a partnership or sole proprietor you, you do. So.
[00:10:51] Rob Williams: Yeah, that, that was my question. That’s where I was– great. So it sounds like it’s still the same rule that it was 20 years ago.
[00:10:58] Wade Carpenter: It is, yeah. And the LLC thing has confused a lot of people. Even today, 20 years later, after all these LLCs came into place.
[00:11:06] Rob Williams: I think the other issue there is people think, okay, well I have his EIN number. Does it have anything to do with this? Because people ask for an EIN number sometimes.
[00:11:18] Wade Carpenter: Well, you can actually get an EIN number for a sole proprietorship, an individual.
[00:11:24] Rob Williams: Yep.
[00:11:25] Wade Carpenter: Believe it or not, or a partnership. So having an EIN number doesn’t mean anything.
[00:11:30] Rob Williams: Yeah. Well that’s what I’ve–
[00:11:31] Wade Carpenter: –number for banking purposes.
[00:11:32] Rob Williams: I have your e n number, you don’t need a 1099. Does that have anything to do?
[00:11:36] Wade Carpenter: No, it has absolutely nothing to do with it, and you still have to ask the question.
[00:11:40] Rob Williams: –say that actually with me, so
[00:11:41] Wade Carpenter: If you’ve got a new subcontractor, before you pay them, get that W-9. Say you’re gonna withhold the money until you get that number because we’re coming fast up on January here and, a lot of people are scrambling now probably to try to find who we paid these things to.
Consequences of not having proof of who you paid
[00:11:57] Wade Carpenter: As an accountant, seeing all these Cash App, Venmo, that kind of stuff, they do not show who these people are for. And you just send the money and it’s done. And believe it or not, you’re probably going to be on the hook. You could be on the hook for their federal and state taxes and the unemployment on it, as well as social security and Medicare. When a contractor gets, and again, this is getting into the employee versus independent contractor, but you know, worst case if you don’t have proof of who you paid, that you gave a 1099 to, they could very well disallow that deduction for your company. This means you’re paying taxes on that for them, right?
[00:12:37] Rob Williams: Got it. So how does that work? Because I don’t recall, all the thousands of people that we paid, and we were very stringent in all my companies about that, having those 1099s and stuff up front, but I don’t recall ever to go back and do that. And maybe it’s because of our processes.
But if they do say that we have what should we be scared about? Do they just say, okay, here’s that $10,000. Well now that’s not deductible. We’re gonna disallow that. Or do they go into that person and figure out how many taxes he owes and stuff and make us pay his taxes?
[00:13:11] Wade Carpenter: Well, I’ve seen that and that gets back into that employee versus independent contractor issue. But if you don’t have proof of that, they could completely disallow the deduction.
[00:13:23] Rob Williams: Okay, so that’s the penalty is not–
[00:13:26] Wade Carpenter: Well, no, that’s not the penalty I was gonna talk about. So–
[00:13:29] Rob Williams: Oh.
[00:13:30] Wade Carpenter: Are we getting a little dark on here, Stephen?
[00:13:32] Stephen Brown: No. No. What’s the penalty? Lay it on us. Let’s get it over with.
Penalties for not handling 1099s correctly
[00:13:36] Wade Carpenter: Number one, the due dates have changed. And there’s penalties around the due dates. So you have to get 1099-NECs out by January 31st. They still have the 1099 Miscellaneous for other things like rents and some of that other stuff. But the 1099-NEC has to be to the recipient by January 31st. It has to be to the government by February 1st of ’23. We’re ending ’22 and going into ’23.
[00:14:10] Rob Williams: I said I haven’t ever had any problems I forgot about this. I may have had to pay that penalty before for not doing it on time. That fee, especially if it was like a small company and I was like, oh, we didn’t do our 1099s. We got five of them we didn’t file. It’s like a couple hundred bucks or something.
[00:14:27] Wade Carpenter: And you remember the other big act basically is hiring 87,000 IRS employees. But, this is a precursor to some of this enforcement stuff. But the penalty, it’s supposed to be if you’re late between February 2nd and August 1st, it’s $50 per form.
Not each, but like it’s $50 per 1099, you didn’t give to a maximum of $588,500. If you’re after August 2nd, the penalty goes to $110 per form, to a maximum of $1,766,000. If it’s after August 1st, it’s $580 per form for a maximum $3,532,500.
[00:15:10] Rob Williams: Whoa.
[00:15:12] Wade Carpenter: There’s an additional penalty for intentional failure to file that starts at the $580 per form and has no upper limit. So I don’t mean to scare some of our contractors listening to–
[00:15:26] Stephen Brown: –our Christmas, Wade.
[00:15:28] Rob Williams: I think we should have started with that, because now everybody’s gonna rewind this show and go back to the beginning and–
[00:15:34] Stephen Brown: Well, hey, now they need to listen to what Wade was saying, right, listeners?
[00:15:38] Rob Williams: Are these penalties new? I just remember that first penalty. I didn’t remember these other penalties, the–
[00:15:43] Wade Carpenter: Well, they, a lot of them are not new, like the $50 per form and that kind of stuff.
[00:15:47] Rob Williams: I remember that one.
[00:15:48] Wade Carpenter: They started putting that in there a little bit, practically speaking, for several years they, they just ignored it and as long as you submitted it, you wouldn’t have a problem.
You normally didn’t have a problem unless employee said, I didn’t get that 1099, somebody reported you. But you know, especially when you check the box now, a few years ago they made us check that box on your return and you said, yes, I filed all these, but you didn’t. You’re asking to get one of these nasty penalties.
[00:16:17] Stephen Brown: Yeah, you’re begging for it. Wade. This is great information. Listen up. It’s there. Okay, well we understand it. I do. And–
[00:16:27] Rob Williams: It’s got me scared. I’m gonna be —
[00:16:29] Wade Carpenter: –trying to scare anybody.
[00:16:30] Rob Williams: If in doubt, send it out. Maybe that–
[00:16:33] Wade Carpenter: There you go. I like that. Well, actually that does apply to what I was gonna say on that, if you’re using like these third party apps and they’re sending those things, but I would say exactly that. I like that Rob. When in doubt, send it out.
[00:16:45] Rob Williams: Yeah.
[00:16:46] Wade Carpenter: Because you don’t know if they’re sending this and you do have an obligation for that. So if you’re listening to this, number one, half the battle for somebody doing 1099s is tracking down that information. If you don’t have it when you first paid them.
[00:16:59] Rob Williams: And it’s actually —
[00:16:59] Stephen Brown: After the fact, you can forget it.
[00:17:02] Wade Carpenter: Yeah, they’re gonna disappear on you.
[00:17:04] Rob Williams: Yeah. It’s a lot easier than it used to be now that they’re these, I guess they’re third party, 1099 filing apps. I remember we used to print all those things and send them out and now you can just go online and, especially if you’re a small company, we just got two or three of these things, because I, I remember going to the post office and getting those things and–
[00:17:24] Wade Carpenter: The forms and–
[00:17:25] Rob Williams: All that time to send out two pieces of paper was just crazy. And now you just go online right there and it takes you five minutes. It takes you four minutes to Google it and figure out where the app is and one minute to fill it out. So.
[00:17:39] Stephen Brown: Yeah, get her done. Went in doubt, send her out.
[00:17:42] Wade Carpenter: Again, just if you have any questions about the rules, go see your CPA. Talk to them. Don’t wait, and just sweep it under the rug. I know contractors hate doing these things, but you really should pay attention to it. And as a one of my colleagues said, if you’re using Cash App in your business, don’t do that. Can I say that out loud?
[00:18:01] Stephen Brown: Yeah, you did well. That’s true, unfortunately. Okay. All right. Well, if you’re using cash apps for your business, you’re probably not listening to our podcast anyway, but you could be and don’t do it, that’s all.
[00:18:14] Wade Carpenter: You’d be surprised how many of my contractors are using them.
[00:18:17] Rob Williams: No, there are a lot, actually I remember watching one of these shows, that are similar coaching things, kinda what we do. And they have whole sections on teaching you how to use the cash apps and all that stuff is, as–
[00:18:30] Stephen Brown: Oh boy.
[00:18:31] Rob Williams: Especially for the ones doing residential work, business to consumer. That’s where it’s really popular.
[00:18:39] Stephen Brown: I’m naive about those guys. Thanks for educating.
[00:18:41] Rob Williams: Yeah. It’s a good way that’s like, hey, just use my Cash App, these, anyway. We won’t go into that whole explanation. But it is getting more and more common.
[00:18:52] Wade Carpenter: I hope this gave everybody some good information and try to keep you out of trouble.
[00:18:56] Rob Williams: Well, it did, but I think I’m gonna have to order some blood pressure medicine. I can feel it going. I don’t know if my face turned red when you started talking about–
[00:19:04] Stephen Brown: Rob, Venmo me some money. It’ll lower your blood pressure.
[00:19:07] Rob Williams: Yeah. Okay.
[00:19:08] Stephen Brown: All right. Thank you.
[00:19:10] Rob Williams: All right. Well, thanks everybody for coming to the Contractor. Success Forum. And guys, now where can they see us? This is like speaking of Cash Apps and all this modern stuff. Well, People can see us on YouTube.
So, look at our YouTube channel if you didn’t. Now, if you’re looking on YouTube and you do are in your car or your truck, you can go in those little apps, different podcast apps. You can listen to us. But go find us.
And if you don’t know either one of those, just go to Contractor Success Forum dot com where you can get a lot of information out there and even transcripts of these, if it’s a show that you really want notes on it, if it’s something you’re really into, I don’t think people know that we actually have our transcripts on there.
So go on there. Lots of resources and they’re probably extra goodies on there that you can get. Contractor Success Forum dot com. Well,
[00:20:01] Wade Carpenter: Actually, Rob, can I mention, since we’re doing this, I was giving basically a year-end checklist on these 1099 rules to my clients. But if anybody’s listening to this, I guess I could put it on my website, at Carpenter CPAs dot com where you can download it yourself if that helps anybody,
[00:20:18] Rob Williams: Yeah. And maybe we can put a link to Carpenter CPAs dot com on this episode so they can go maybe, maybe a link directly to that. They can find it either in the show notes or going straight to his website to find this out. Repeat your website again.
[00:20:32] Wade Carpenter: It’s Carpenter CPAs dot com.
[00:20:34] Stephen Brown: Thanks for doing this. You’re a beautiful person.
[00:20:37] Rob Williams: All right. Well thanks for putting up with our last two minutes of comradery and kumbaya. Come back and see us at the Contractor Success Forum. We’ll see you now on the next show.