Understanding Payment Reporting Obligations for Contractors and Credit Card Transactions
When making payments to contractors, including law firms and attorneys, understanding reporting obligations is essential to ensure compliance with tax laws. A key point of clarification involves payments made via credit card. These transactions do not require additional reporting by the payor because of specific IRS rules regarding merchant payment processors. Here’s what you need to know.
The General Rule: Reporting Contractor Payments
Typically, when you pay a contractor $600 or more in a calendar year for services, the IRS requires you to issue a Form 1099-NEC (Nonemployee Compensation) or, in some cases, a Form 1099-MISC (Miscellaneous Income). Before issuing this form, you would typically request a completed Form W-9 from the contractor to gather their tax identification information.
However, an exception applies to payments made via credit card or third-party payment networks.
The Exception: Payments Processed by Merchant Processors
The IRS has established that payments made through credit card companies or third-party payment processors (like PayPal or Stripe) are not the responsibility of the payor to report. Instead, the merchant processor is responsible for reporting these transactions. Here’s why:
1099-K Reporting by Payment Processors: When a contractor receives payments via credit card, the merchant processor (the credit card company or payment platform) will issue a Form 1099-K to the contractor if certain thresholds are met (over $600 in a calendar year, starting in tax year 2023). This form provides the IRS with details of the payments made through these channels.
Elimination of Duplicate Reporting: To avoid duplicate reporting, the IRS specifies that payors do not need to issue a Form 1099-NEC or 1099-MISC for payments made via credit card.
What This Means for You
If you’re paying a contractor, law firm, or attorney via credit card, you do not need to:
Collect a W-9 specifically for these payments.
Issue a Form 1099-NEC or Form 1099-MISC for those transactions.
Instead, the credit card company or payment processor will handle reporting these payments to the IRS and the contractor.
Important Considerations for Law Firms and Attorneys
While the above rules apply broadly, certain payments to attorneys are often treated differently under IRS rules. However, the exception for credit card payments still holds. If you pay an attorney or law firm via credit card, you are not responsible for issuing a Form 1099-NEC or Form 1099-MISC. The credit card processor will fulfill the 1099-K reporting requirements.
Best Practices for Businesses
To stay compliant and streamline your processes:
Track Payment Methods: Clearly distinguish between payments made via check, ACH, or credit card in your records.
Communicate with Contractors: Let contractors know that they will receive a 1099-K for credit card payments from their payment processor.
Document Payments Appropriately: While you don’t need to issue a 1099-NEC or 1099-MISC for credit card transactions, keeping detailed records ensures clarity in case of any questions or audits.
Conclusion
Payments made to contractors, law firms, and attorneys via credit card do not require reporting on Form 1099-NEC or Form 1099-MISC by the payor. The responsibility lies with the merchant processor, which will issue a Form 1099-K if applicable. Understanding these rules can save time and prevent unnecessary paperwork, ensuring compliance with IRS regulations.
For more information on this topic, take a look at this IRS publication, this section of the tax code, or Google “do I have to issue a 1099 to a law firm I paid via credit card?”