First, I am not a lawyer, I am not an expert in taxes, and I’m not even an accountant. So all of the information below I’ve received from other professionals who’ve advised me of the following in regards to 1099’s, in addition to online resources.
It’s that dreaded time of year again in the US. Taxes. You’re trying to figure out what all you need to get started or to send to your accountant. Your accountant may even be telling you that you need to collect W9’s and send 1099’s to the freelancers you’ve hired. In some instances this may be true, but in others, you don’t need to collect and send them. Below I’ll help you navigate based on what I’ve been advised.
Did you pay your designer (or freelancer) through a third-party (PayPal, Stripe, etc)?
If the answer is yes, then you do not need to obtain a W9 and please don’t send a 1099-MISC to your designer. Why? By using a third-party processor, PayPal (or another third party) is already reporting the designers income through a 1099-K, so if you report it too using a 1099-MISC, it’s considered double-reporting and that can trigger an audit along with a whole hassle of issues for the designer. The IRS will consider it as extra income and the designer would get penalties for “not reporting it” even though it was actually reported twice and not additional income.
Documents to back this up: https://www.irs.gov/instructions/i1099msc#idm139665634587392
Here is the line about the 1099-K and how those payments made are not subject to reporting on a 1099-MISC:
Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K.
Now, did you pay through PayPal and pay them using Friends and Family?
First, this is a BIG no-no because it’s against PayPal’s terms of service, so if your designer is requesting this, this should be a BIG red flag to you. Always, always have your designer (or freelancer) send you an invoice for their work. Always. I cannot stress this enough.
In regards to taxes, if the designer has a business account it will report it on the 1099-K that PayPal sends, but if they just have a personal account it will not report it. In the case of the latter, you can send a 1099-MISC to the freelancer, but you’ll have to ask them before sending it.
Going forward, have your designer send you an invoice!!!
Did you pay your designer (or freelancer) by physical check or cash?
If the answer is yes, then you can send a 1099-MISC to your designer if you paid your designer $600 USD or more in cash/check during that tax year. Simple as that.