qbteachmt
Level 15

Let me help with this part:

"But the IRS is always updating how it processes return. Example the 1099-misc used to be for sales (box 7 IIRC) and now it's the 1099-k."

The 1099-Misc, -NEC, and -K do not Replace each other. They meet different requirements. A landlord gets a 1099-Misc from their business tenant for rent in Box 1 if that business tenant has paid $600 or more that year. If the landlord accepts rent paid through a PayPal portal, and the landlord gets $20,000 and 200 transactions, then they will also get a 1099-K (from PayPal).

This has nothing to do with Sales. It has to do with Funds. I don't need to send a 1099-NEC to a corporation for services, which might still get a 1099-K because of how they get paid by customers. I don't need to send a 1099-NEC to a service provider who I paid through my VISA card, either, because VISA will be reporting that, even if I paid $600 or more. VISA carries the 1099-K requirement, but not my 1099-NEC requirement. If I pay the service provider, who is not a corporation, with cash, I will be issuing a 1099-NEC. Notice the differences are Entity Type and type of Funds. If I pay a corporation with cash, they will not get a 1099-NEC from me and they don't get a 1099-K from anyone. They still report this as part of revenue.

1099-Misc used to have box 7 for Non-employee compensation (NEC = payment from a business, to a business or person, providing Services, not Products, threshold for reporting is $600 or more). That NEC was moved back to an older retired form 1099: the 1099-NEC.

1099-Misc Box 7 has been repurposed and is used for direct sales made to you. Example: multi-level marketing, which has a threshold of $5,000 and allows the Seller to "inform" the IRS that this person is acting as a reseller and now the IRS knows to be expecting a tax return filed by the person buying and then reselling products. From a tax reporting perspective, this box is for informational purposes only, as the buyer will be including the purchase price of these items on their tax return, typically as an inventory expense. Not Income. This only changed in 2020. This is another example of informational.

Separately, a new form came about a few years ago, and that is 1099-K. It is for Settlement Processors to use, when you run money through them, such as Credit Card Merchant Account providers. The reporting on a 1099-NEC is not needed if you paid that service provider using, for instance, VISA card, PayPal, or MasterCard. These are Payment Card and Third Party Network Transactions. A PSE (payment settlement entity) that handles your alternative to traditional Banking, in other words, and they have the requirement to report to the IRS the amount of activity when an account holder or merchant card terminal holder has $20,000 and 200 transactions.

https://www.irs.gov/instructions/i1099k

And it's informational to the IRS. Not tax return info. I've never seen "matching" and don't see how it would even work.

Example:

You are a wedding planner and get VISA payments and as deposits. You got over 200 payments last year; some of them were events that worked (revenue); and many payments were Deposits against events that did not happen, which total $25,000. Everything here is now reportable by VISA to the IRS and to you on 1099-K.

You had a gross revenue of over $50,000.

The 1099-K will show $75,000.

But you had to return all $25,000 of the Deposits, which are not seen on the 1099-K as netted against gross.

"If what you say is true that IRS doesn't "add up" the 1099's and look to see at least that much in sales is reported than there is no problem."

Functionally, you never just "add up" 1099s at all. That is not a "thing" for taxes. I explained this.

As I stated, nothing prevents the IRS from sending a letter and asking for some clarification or more details. That doesn't mean there is a problem, as long as the tax return has the details that apply to that entity. If they come looking or need an explanation, there should be "nothing to see here" that is any different than what got reported.

 

And this is why it's never good to commingle funds. You should always be prepared to prove you reported them separated properly, because commingling is frowned upon, for the reasons you now face.

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