Published: December 14, 2022

Overview

To debunk some myths about Form 1099-K in today’s blog, we first need to set out two examples we will work with for the remainder of the discussion. They come from two angles: 1) the payer who is responsible for issuing Forms 1099-K, and 2) payers who make their payments through third party payment processors that issue Forms 1099-K. For simplication, we will stick with examples where there are vendor payments for non-employee services. Additionally, we will use Stripe as our well-known payment processor but the same discussion could be had for payments made through PayPal, Payoneer, etc.

The two myths we will set out to dispel today are:

Myth: If you are a gig or marketplace platform that meets the definition of being a TPSO responsible for issuing a Form 1099-K, it is not always a given that you are exempt from issuing Form 1042-S to Non-US Person payees. If you have receipt, custody, or control over a payment for which you have an active involvement then you may be a withholding agent and obligated to file Form 1042-S to any Non-US Person payees that have received reportable US sourced income (services provided inside the US). The Form 1099-K rules are written in a way that seems to exempt these payments from reporting but what they actually do is exempt the payments from Form 1099-K reporting. There is no provision exempting them from Form 1042-S reporting if the platform and the payment otherwise meet the requirements to be reported.
Myth: If you are operating a trade or business, and pay your vendors through a Stripe account, it is not always a given that you are exempt from your own Form 1099-NEC reporting. To avoid duplicate reporting, the IRS does state that if you pay your vendors with a TPSO then you are exempt from doing your own Form 1099-NEC reporting but only in the case that you have confirmed that the TPSO will issue a Form 1099-K instead. While Stripe is a well known TPSO, they are not always a TPSO depending on the product being used to settle the payment. As such, unless you have explicit knowledge/confirmation that Stripe (or other payment processor) is a TPSO and issuing a Form 1099-K, then you should do your Form 1099-NEC reporting as normal. Additionally, because TPSOs only issue a Form 1099-K for US Persons, you may retain the obligation to file Form 1042-S to any Non-US Person payees that have received reportable US sourced income (services provided inside the US) unless the TPSO is also a withholding agent for Form 1042-S purposes.

This is best illustrated with examples below as we walk through the logic.

Meet Jane Consultants and HireMe, Inc

Jane Consultants: Jane runs her own business called Janes Consultants. In the course of her business in 2022, she hires a US graphic designer and pays them $1,000 for their services. She also hires a non-US graphic designer who is working remotely in the US for a few months and pays them $500 for their services. She read in a blog online that if she pays her vendors with Stripe then she does not have to issue any tax reporting to the graphic designers because it’s Stripe responsibility from that point on.

HireMe, Inc platform: HireMe, Inc is an online platform that helps gig graphic design workers create an account and find paid work. Individuals seeking a graphic designer (like Jane) can come to the HireMe platform and create an account, find a graphic designer they like, hire their services, and pay through the platform. The graphic designers can get paid out through the use of an integrated Stripe Connected Account to the platform.

In the below flow examples, Form 1099 and 1042-S reporting obligations of Jane Consultants are shown in black, obligations of Stripe are shown in green, and obligations of HireMe platform are shown in blue.

Flow 1: Direct payment by bank transfer

To simplify this discussion and then layer on top of it, let’s start with a scenario where Jane hires graphic designers that she knows personally through her network. She pays the designers by a standard bank transfer. There is no gig platform or Stripe accounts involved. Jane would have full normal responsibility for the tax reporting on those payments.

Flow 2: Payment through HireMe platform in a Stripe Connected Standard Account

Now let’s imagine that Jane hires her graphic designers through the HireMe platform. If the HireMe platform has integrated with Stripe Connect via their Stripe Connected Standard Accounts, then you can see that the US graphic designer will receive a Form 1099-K from Stripe but that Jane still needs to issue the Form 1042-S to the non-US graphic designer. In a Stripe Connected Standard Account, the payment flow is peer-to-peer directly from Jane to the graphic designer and the funds never enter an account designated for HireMe platform.

Flow 3: Payment through HireMe platform in a Stripe Connected Custom Account

This is only a slight change from Flow 2, in that the type of account for the seller is now a Stripe Connected Custom Account. With these accounts, you will typically find that the flow of funds first enters a Stripe account designated for HireMe platform before being transferred on to the seller’s Stripe Connected Custom Account. In the case that HireMe platform has custody and management oversight of the payments, guarantees the payment, and is a middleman and withholding agent to the payment, then the Form 1099-K and Form 1042-S reporting requirements shift to HireMe platform.

Flow 4: Payment through HireMe platform and Stripe, with no guarantees

Though this would be an unusual outcome, it is possible and effectively reverts the tax reporting obligations back to Jane Consultants. In this scenario, the Stripe Connected Custom Account is not a TPSO, middleman, or withholding agent. The HireMe platform has no management oversight or other active involvement in the payment nor offers any guarantees of payment to the seller potentially rendering it in the same position as Stripe. In this case, with no third party in the middle with the obligation to issue Forms 1099-K, Form 1099-NEC, or Form 1042-S, the obligation to report returns to Jane Consultants.

Why do we have such different outcomes?

Though one of the shortest 1099-type regulations in the Internal Revenue Code, IRC Section 6050W seems to cause some of the most trouble due to the layering effect of multiple parties potentially having a reporting obligation but no effective way for everyone involved to really know that. Every scenario must be evaluated against the Terms of Service of the platform and payment processor involved, followed by confirmation with those parties, before a firm position can be taken as to who should report in order to avoid duplicate or under-reporting.
The Form 1099-K regulations were written in a simpler time when we had credit cards, PayPal, and Stripe. This was before we had more complex layers of platforms that do more than just settle payments, such as Airbnb, Uber, UpWork, and other gig or marketplace platforms. As the Form 1099-K regulations were not designed with these gig and marketplace platforms in mind, it can be hard to distinguish what role the platforms have and who needs to report.
As Form 1099-K reporting is only for payments of goods and services, if you have a gig/marketplace platform that makes payments of other types of income for which it meets the definition of being a middleman, it may not have a Form 1099-K reporting obligation but could instead have a Form 1099-MISC obligation in its place.
Pure payment processors like PayPal and Stripe are frequently TPSOs, but are not typically middlemen (for Form 1099 purposes) or withholding agents (for Form 1042-S purposes). But the gig/marketplace platforms that are more involved in transactions and oversight of services are more likely to fit into the definition of middleman or withholding agent and have more expanded obligations than PayPal or Stripe. One of the single most relevant facts in the Terms of Use of these services is whether they guarantee payment to the seller. Where the service does not include a guarantee, then the TPSO definition is not met. This is why some Stripe products require Form 1099-K reporting (e.g. the Connected Standard Account) but others do not (e.g. the Connected Custom Account). This is due to differences in the Terms of Use on the account types.

Conclusion

The tax reporting obligations when payments are made through third party payment settlement organizations or gig/marketplace platforms are incredibly nuanced. Each set of circumstances requires a very close evaluation of the parties involved and their Terms of Service. The examples here cannot be relied upon for any reader to conclude their own tax reporting obligations as I have not provided every possible factor that fit into the setup of each example. The purpose of this blog is to illustrate that the tax reporting is not as straight forward as it may seem and the outcomes can vary depending on how each party has interpreted their own role in the payment and the resulting tax reporting obligations.

How can Dune Consultants help?

Contact us today to discuss at info@duneconsultants.com. Or you can jump in the calendar for an introduction call.

Form 1099-K myths debunked