This post is part of my Business of Writing series. As part of this series, I discuss law and taxes, so it's important for you to remember that I'm neither a lawyer nor a tax professional. This is not advice -- it's my understanding and, in many cases, what I do and why. You should take this as the base to develop your own knowledge and understanding, or consult the appropriate professionals. Also, I live in the US, so am really only speaking to US law and the US tax code.
I see more conflicting advice about 1099s every year than anything else. As an author, you’re going to get 1099 forms from those who’ve sent you royalties or other payments, but do you need to send them to those you’ve paid, such as your editor, cover artist, or other authors you might have split boxset royalties with?
Several years ago, the IRS began requiring that 1099-MISC forms be sent to anyone paid more than $600 in a year, but then there was also the 1099K form sent by payment processors like credit card processors and PayPal. (Note: Royalties are different, see below.)
So … if you send the 1099MISC and PayPal sends the 1099K, then the poor editor winds up having to explain that, no, she didn’t receive the money twice. The rules were confusing, and still are, because the 1099K is only sent if more than $20,000 was paid … but how are you to know if your editor makes that much?
Many tax preparers have been saying to send the 1099MISC anyway and let the contractor sort it out … which is a pain.
In addition, in order to send the 1099MISC you also need the contractor to fill out a W9 with their social security number and keep that form for four years. (https://www.irs.gov/businesses/small-businesses-self-employed/forms-and-associated-taxes-for-independent-contractors)
For the record, it’s probably a bad idea to be sending W9s with SSNs through email, or, if you have already, leaving them sit around in your email history.
The current 1099MISC instructions are a little clearer:
This makes it clearer to me, at least, than past years, because the 1099MISC instructions don’t mention the 1099K’s reporting threshold. The wording “Payments made with … are not [emphasis added] subject to reporting on Form 1099-MISC” settles it, in my opinion.
In addition, Intuit’s Quickbooks explicitly excludes payments made through these processors from the 1099s Quickbooks generates:
For these reasons, I don’t collect W9s or send 1099MISC forms to contractors I pay with credit card or PayPal or through other payment networks. If I pay via cash or check or ACH I do. I’ve also heard rumblings that there are IRS penalties for overreporting 1099 income to a contractor — which you’d sort of be doing if the contractor was also getting a 1099K for the income. Sort of a damned-do/damned-don’t situation.
Here are a couple other resources that seem to support my decision not to send 1099s to those I paid through a payment processor:
The corollary of this, of course, is that you also do work as an editor or artist, you might receive 1099MISC forms from those you did work for, but those funds might then have been reported twice, and you’ll have to document that. It might result in your having to explain it to the IRS, but that’s better than paying taxes twice.
Royalties you pay to other authors, either a coauthor or authors in a boxset you organized, may be different.
These are not part of the $600-rule, but rather the $10 royalty rule. Either way, it’s the same 1099MISC, and the “payment processor”/1099K rule might also apply to this — but it’s possibly different. I tend to think that it is the same, given the placement of the 1099K instruction on the 1099MISC instructions — it appears to be general, regardless of the purpose of the 1099MISC (i.e. it applies to all uses of the 1099MISC, meaning do not file one if you use a payment processor).
Consulting a Tax Professional
If you do consult a tax professional on this issue, you should explicitly explain the method of payment and ask their opinion on the current 1099-MISC instructions, as well as pointing them to the Intuit link above. There are changes to the tax code every year, and they can’t always keep up with small changes in wording that might significantly change their interpretation.