Are you ready to unravel the intricacies of 1099 forms? Then buckle up, because our CPA extraordinaire, Michelle, is here to help you navigate this often confusing territory. We'll be dissecting the frequently encountered 1099 MISC and 1099 NEC forms, and delving into the recent changes made to the 1099K form. Michelle will explain the vital role W-9s play in dealing with vendors and contractors, and how the IRS uses this information. Plus, she'll offer insights into her own decade-long business journey, emphasizing the importance of continual education to keep up with shifting tax laws.
But the knowledge journey doesn't stop there. The latter half of our conversation focuses on the critical aspect of differentiating your personal and business expenses and ensuring that your reported gross revenues align with the 1099K form obtained from merchant processors. You'll learn how to verify the accuracy of your 1099s and understand the correct way to classify employees versus contractors. And because we appreciate the support we receive from our listeners, we're giving a special shoutout to all the moms out there cheering us on. If you're a small business owner seeking to make sense of your financial obligations, this episode is an enlightening and essential listen.
https://www.michelletraczcpa.com/
This program is brought to you by:
Balanced Virtually
Be sure to visit BizRadio.US to discover hundreds more engaging conversations, local events and more.
Are you ready to unravel the intricacies of 1099 forms? Then buckle up, because our CPA extraordinaire, Michelle, is here to help you navigate this often confusing territory. We'll be dissecting the frequently encountered 1099 MISC and 1099 NEC forms, and delving into the recent changes made to the 1099K form. Michelle will explain the vital role W-9s play in dealing with vendors and contractors, and how the IRS uses this information. Plus, she'll offer insights into her own decade-long business journey, emphasizing the importance of continual education to keep up with shifting tax laws.
But the knowledge journey doesn't stop there. The latter half of our conversation focuses on the critical aspect of differentiating your personal and business expenses and ensuring that your reported gross revenues align with the 1099K form obtained from merchant processors. You'll learn how to verify the accuracy of your 1099s and understand the correct way to classify employees versus contractors. And because we appreciate the support we receive from our listeners, we're giving a special shoutout to all the moms out there cheering us on. If you're a small business owner seeking to make sense of your financial obligations, this episode is an enlightening and essential listen.
https://www.michelletraczcpa.com/
This program is brought to you by:
Balanced Virtually
Be sure to visit BizRadio.US to discover hundreds more engaging conversations, local events and more.
Welcome to the Veronica Edwards Show, where we have fun financial conversations that everyone listening can apply to their personal and professional life. I'm your host, veronica Edwards, and I'm so excited, as always, to be back here another week on bizradious. As always, I want to thank everyone for downloading the podcast. We've reached over 1,750 downloads, which is 750 more than we had the beginning of season 2. So I'm super excited that we've had really good content and folks continuing to listen to the show and to support every week. So I'm excited today, especially because we have our monthly segment.
Veronica:It's our CPA chat with my fellow CPA, miss Michelle. Michelle say hello to everyone, hello everyone. So, michelle, how are you doing? We were just chatting that we've passed our 1099 deadlines and we're going to still be talking about 1099s, and this is going to air in March. But we know that it's always like a scary time for folks that don't really understand the forms. Even as a CPAs, the forms change all the time, so we thought it would be great to talk about one of the scarier ones. That just changed recently is the 1099k, but before we get into that, I always like Michelle to talk about her business that is 10 years old. Now I'm going to be turning. What 11 in 2023?
Michelle:Yeah, very soon, yeah, 11, and I appreciate that. And yeah, we of course work with small businesses to mid-sized businesses and nonprofits of really all sizes and viewing everything from soup to nuts, with the exception of the income tax work We've talked about this before. We leave that to the specials who really focus in on the tax preparation process, so we'll let them be those specialists and we do everything else for our clients and we're happy to be here.
Veronica:Absolutely, and we partner with those other CPAs because, again, we work hand in hand. We have to make sure that we know what's happening on the tax side. We just don't want to always be responsible for researching all the new tax laws that come out. So let's go ahead and talk about 1099k. So on our last CPA chat, michelle, we talked about the most common 1099s that small business owners are usually familiar with the MISC, the miscellaneous, the NEC, which is the most common. But let's just go ahead and just do a refresher, michelle, if you can just explain again what is a 1099 and who receives it.
Michelle:Yeah, absolutely. I mean, you were talking before about this being sort of a scary concept for most business owners and even though we are beyond the actual deadline for filing, that being the end of January there are some other filing deadlines in February but for the most part it's just one of those things that people just like I don't understand and then they get through it and then they quickly forget, because we do this once a year and so it can be a little frustrating and a little confusing, and so what we try to do for our clients is we try to continuously educate. So all the time we're talking to our clients about oh I see you have a new vendor. This vendor is doing exactly these kinds of particular services that look like to be an independent contractor, and so we want to make sure we get a W-9 from them so that we don't have to chase them down at the end of the year, and so we're always trying to educate our clients in that way, just so that it's not a scary thing at the end of the year.
Michelle:But to your point, 1099 is by and large the most popular. The most used ones are the 1099 miscellaneous or the 1099 NEC, standing for non-employee compensation, and those two are the most widely used for at least our clients, that being small businesses and nonprofits. And that's because, on a miscellaneous form, for example, we're going to report any rental fees or landlord fees or lease fees that we paid. And then we're also going to 1099 NEC going to report any compensation, a call compensation, because that's what we're doing we're paying people who are non-employees and these folks are also in their structure, are non-incorporated, so they're I'll say a different way unincorporated, particular businesses or individuals that performed services for our business and we gave them $600 or more in the calendar year for those services.
Michelle:We're going to report that to the IRS on what's called a 1099 NEC or a non-employee compensation form, and these forms are, you know, to the IRS and their information forms. You know, no money is necessarily obviously due with when you file these forms, but you are obligated as a business to report this information to the IRS each year. So the IRS knows oh, you paid Joe Plummer $1,000 in calendar year 2022. And so they're going to, in the background, the IRS, they are going to, in the background, make a match, and so Joe Plummer, when his tax return comes to the IRS, they want to see that they're reporting at least that $1,000 in their gross revenue. So that's kind of how that works behind the scenes. Hopefully that's, you know, demystifies the whole process a little bit.
Veronica:Absolutely, and we talked about in the last CPHAT. My best practice is, regardless of if the vendors and corporate are not, just get a W9. You know, just get a W9 before you pay anybody, just because you can file that, you can have the information. It also has their address. It has useful information. You would need to set up a vendor in your QuickBooks or whatever financial management system that you're using. But yeah, michelle, I like how you broke that down. It doesn't sound as scary. It's just somebody that we paid $600 to, that is not incorporated and that we need to make sure that Uncle Sam gets his taxes. So let's move into then.
Veronica:If we know what a 1099 is and we know that there's different versions of 1099s or forms, we're talking today about the 1099K and on the 1099K, it reports the gross amount of payment transactions from credit cards, digital payments via third party networks like Venmo, cashat, paypal a lot of things that we didn't necessarily see in the beginning of our accounting career, right, michelle? But that now it's popping up and basically any other freelance platform that manages payments between two parties. So remember, these 1099Ks are just for business. So if I decided, hey, I want to cash out, michelle, it's her birthday, or Michelle had sent me something when I was out of work for surgery. That's not business, that's personal. So keep in mind. Some people might be like, oh my goodness, I've spent so much money on Venmo or Cashat and again, this is a business information return.
Michelle:Right, exactly what's interesting about the 1099K, just for starters, is that most of our listeners are probably not going to have to worry about generating these forms, right, because they're coming from these third-party settlement organizations, these cash apps, the Venmo's, these merchant processors that hold our credit cards, et cetera. And, as you very well described it, a merchant processor is an organization that serves as that kind of go-between between the bank and the business, so it's someone who is sort of making that transaction happen, and it's through these credit cards. It's a digital transaction or an electronic transaction and not cash. So, for our clients, we focus the 1099 efforts on, again, those unincorporated, non-employees who we paid $600 or more for services throughout the calendar year and we paid them by cash or by check. That's because those merchant processors are going to be the ones responsible for issuing what you just called, appropriately, this 1099K form. And so what's interesting about the 1099K form is that there has been a slight change just when you thought you had this whole thing downpacked. Of course, of course, yeah.
Michelle:So the 1099K came into play several years ago and it was an IRS position that they took that said look, we know that there are parties out there using these third-party settlement organizations cash at paypal, that kind of thing and predominantly, if you think, like the IRS, their role is to make sure that, as you said, uncle Sam's getting their money, but it's to enforce the rules. And what they started discovering is, for example, your hairdresser. You go and get your hair cut and the hairdresser's like, oh, don't worry about paying me with cash or check or whatever, because for the hairdresser that's just another thing they have to do go to the bank, deposit the money, et cetera. They're like oh, there's this thing called Venmo and you can just Venmo me the money and then it's just directly deposited into their bank account or wherever they point the money to. Well, hairdressers are having all their clients pay them via Venmo and then suddenly that's not being reported to the IRS.
Michelle:So the IRS is like, well, wait a minute, what happened here? So they want to make sure that they have this outside objective third party verification of the revenues that some of these contractors are receiving. So again, using that hairdresser example, I'm sure that your hairdresser every year reports all the income that they receive on their tax return. And the IRS is like well, just to be sure, I want Venmo to send me a 1099K to say that in total they received X amount of money. And so what happens is the 1099K from Venmo at the time was required to be issued only if your hairdresser received $20,000 or more or in 200 transactions or more. This information, so anything below those thresholds, wasn't necessarily required to be reported Now, michelle let's pause there.
Veronica:Yes, and don't you think that's a bit high of an amount? Like when I was looking at how the law changed, I was like really it was up to $20,000?.
Michelle:Yeah, it is high and I agree, I think it was high from the very beginning. I'm not really sure why those numbers, those thresholds were set, and I guess it's probably because the third party, settlement organization, these credit card companies, merchant processors et cetera that's a lot, even at those thresholds.
Veronica:I can only imagine Wow, and they're going to be happy now with the new threshold. So go ahead and continue. I guess, I just wanted to pick your brain on that because when I was researching it sounds like really it was $20,000. Yeah.
Michelle:Yeah, that is high, but again, I think that probably helped them Well along the line in the most recent tax law changes where we've had the pandemic and all the things happening. And now, of course, as you mentioned before, more and more people are using these electronic digital payment acts and forms of commerce, and it's not always be a cashier check. I mean, actually, how often do you have cash in your wallet? I don't know about you, but I hardly ever carry cash.
Veronica:I certainly had to go to the bank yesterday to get a cashier check for my HOA because one I have checks, but I'm like I don't want someone to hold my check for like a week and then I forget about it. And then to your point, on the business side, I've never received a check. I always invoice people through QuickBooks, who's my merchant provider for payments. So yeah, wow, that's the answer. Yeah, exactly.
Michelle:We're all doing the same thing. I do the same thing, our clients pay us electronically, we don't accept cash or checks anymore, and so it's just it's moving more and more in that direction. So the IRS has now changed their rules and the interesting thing was that the rule was supposed to go into effect. The new rule was supposed to go into effect for 2022. And so we started telling all our clients and hey, this is happening, but it was sort of not very well known, not very well educated into the general public, so to speak. So a lot of people complained and, including the AICPA, which is the American Institute of CPAs, we wanted to make sure that everybody was on board and didn't want to cause confusion Because, as you mentioned, a lot of MMO and cash up type transactions can be personal, not necessarily business, in nature, and so people were getting really sort of wigged out about this whole thing.
Michelle:Well, the new rule is it's down to the exact same rule as the 1099 Miscellaneous or NEC that we talked about, which is that $600 threshold.
Michelle:So what that means is, regardless of the number of transactions, if you had a business transaction through Venmo, that a business paid through Venmo, another unincorporated business that had $600 or more of your services you bought for their services, for example, then the 1099K would be issued by Venmo to that party, to that service provider.
Michelle:And so it's important, I think, for listeners to understand that when you use Venmo or cash up, there are ways that you can identify your transactions as either personal or business, and that's really the key. So this whole rule now started January 1 of 2023. So that next January, what the merchant processors are going to do is look back at all of the transactions that happened in 2023 and anywhere that there were business transactions of $600 or more, they're going to issue these 1099Ks to those service providers. So it's really important that, as you do these electronic or digital transfers through these cash apps or Venmo's or PayPal or things like that, you code them properly. Are they personal or are they business transactions? You can still use them and still use it to pay your service providers. Just make sure you code it properly is really the key.
Veronica:Got it. And, michelle, you mentioned about the confusion part. Well, of course, the IRS was actually supposed to start this for 2022, correct? And at the very last hour? What in December?
Michelle:Yeah, it was literally like the last week in December. They backed out.
Veronica:Oh, my goodness, I'm glad that they did give that extra time, because to your point it's like this is a completely different change. And I know for me personally, when I started out five years ago with my business and I received a 1099K I never heard of it and I'm a CPA but again, I'm not a tax CPA and then I was miseducated because the company that I was just a contractor for was just like oh yeah, you don't have to worry about it, we pay you through credit card or debit card, so you don't have to pay tax on that, when really I think they meant I didn't meet the threshold of 20,000. So again, that definitely can be confusing to people because they're thinking oh yeah, if I was paid via credit card I don't have to deal with this, but actually if you hit over 20,000, but then you have to also remember what's personal. So to your point, I think that's the biggest thing to remember you have to track what's personal versus what's for business if you're going to be paid that way.
Michelle:Yeah, and I think for our listeners, you know, for my clients, your clients and the businesses that we work with, we are not going to be again the ones producing a 1099 case the merchant processors are. But for our clients, what's important, that I help our clients understand, is we have to make sure that our gross revenues reflect at least as much as we know the 1099 case that they are going to receive from the merchant processors, reflect that was paid to them. So, for example, we have a restaurant client. For example, of course they use a POS system and most customers, like we're just talking about, will pay via credit card and so included in the credit card transaction will be yes, they bought, you know, food and alcohol, whatever the tab was, plus they put the tip onto the credit card.
Michelle:So we have to work with our clients to make sure that we reflect the tips paid as income, which is a separate line item, separate GL account, so it's not bundled up in food and alcohol sales. That's, you know, typical for this particular restaurant client. But we also show that the tip income paid as revenues because on the tax, you know, on the tax side, we want to make sure that the IRS sees that this business received at least as much revenue as with report on the 1099 case. And then, of course, we reflect the tip revenue in the salaries and wages that we paid to our employees. So it's an expense, you know, underneath the revenue, in the proper category, that being payroll salaries, tip income, et cetera. But we also have to reflect tip tip income as an income received up above the expenses in the revenue side of things. So, just, it's just one of those things that we have to be mindful of and aware of and that clients are going to get these 1099 case but they are not responsible for producing them.
Veronica:And on the flip side, I also want to say I've experienced through friends where a 1099 wasn't accurate. So that's another reason why you should track what you receive, because sometimes, hey, we're all human and maybe we misclassified a payment to somebody. I had a friend that said man, I only work like a month with this company and they sent me a 1099 for like $50,000. And what you don't want to do is just accept it because they're sending. All your 1099s are not only going to you, it's going to the IRS.
Veronica:And that's why, michelle, you rightfully so emphasize we have to make sure that, with all the 1099s that you received if it's $100,000, we want to make sure that we can account for $100,000, or revenue, on your profit and loss statement and that we agree with that. Because, yes, we definitely want to make sure that we're paying our taxes, but you want to pay taxes on the proper amount.
Michelle:Of course. Yeah, exactly, and I love the point that you made. Just because you are issuing the 1099s when you are also receiving them, make sure you're checking them and looking at them. Actually, last year I received a 1099. Now we've talked about this before. My firm is taxed as an S corporation, which, because I'm therefore incorporated, from a tax perspective, I do not need to receive a 1099. So my clients know they don't have to send me 1099s because I'm incorporated. Well, I got this 1099 from this particular organization that I was just doing a few teaching classes for and they had, and I've got an EIN, a tax employer identification number I use instead of my social right. So every business should have an EIN number. I had sent them a W9 with my EIN number and denoting that I was taxed as an S corporation. So they sent me a 1099 anyway for starters, but they had the social security number as my EIN number. In other words, they changed my EIN number to be a social security number.
Veronica:Oh no, this is not good.
Michelle:No, you have to review these things and make sure and go back and get them to correct it and so you know your accountant, whoever you're working with and we are helping that are helping you to prepare your 1099s can also help you prepare corrected 1099s, and I think that's an excellent point that you raised, veronica. It's important to check them, make sure they're right, because that information is going to the IRS and we just don't want it to be this bundle of confusion.
Veronica:Absolutely. So that is going to lead us, michelle, to our next CPA chat in April. We're going to talk about how do you determine for the folks that you compensate Are they employees or are they contractors which then will lead us to providing a 1099 for the contractor or W2 for the employee. So, michelle, thank you again, as always, for being a part of the CPA chat. I always learn so much from you. I know the listeners always learn. My moms are number one fans, so shout out to mommy for listening to the CPA chat if nobody else does. But yes, so I just again. I think the listeners for tuning into bizradious. Please come back next week, same time, same place, 10 am on Wednesdays for the Veronica Edwards show, and if you missed the live airing, you can always listen to prior shows at VeronicaEdwardsbussproutcom.
Michelle:See you next time Michelle.