With 1099's due last week, perhaps it's fresh in your mind that paying your partners, contractors and even customers can create tax reporting obligations. What may seem like a simple task often turns into an administrative burden that consumes resources and incurs costs that could well be spent elsewhere.
The digital transformation of payments provides more than hope for those looking for a simpler, less costly way. It can offer a streamlined approach reducing both external cost and internal hours. But transformation may require a new way of thinking about the problem. Your CFO and Finance team might need some time to consider new methods for 2021.
Since it's too late to find a more straightforward, easier way to provide the necessary tax reporting for 2020, we thought we'd offer some ideas that could make 2021 better now rather than waiting for next tax season to start the learning curve. To begin, making payments via a payments platform that integrates data capture for global tax reporting, including provisioning 1099s for US domestic payees, can eliminate most, if not all, these administrative burdens.
1099 Tax Reporting Tips for Digital Businesses
We are not tax advisors nor do we provide legal advice, but we do provide a service that complies with tax regulations and provides the requisite 1099K to all US payees -- and the forms are available for download on January 1, not January 31. And the cost of this service? Zero. The capabilities are built-in. Sound too good to be true? It is one of the often-overlooked benefits of digital transformation by using a digital payments platform and digital wallets.
So how does it work? Simple. Every payee on the platform has a profile that includes their Taxpayer ID and all payments are tracked via the same system. Beneficiary Users (payees) can track all their payments at any time; the task of calculating payments is an ongoing process, so there's no need for heavy lifting at year-end. This makes the data readily available for reporting to comply with regulations in any country. Anywhere. Anytime.
For US payees, the process is taken one step further: generating a 1099-K. Because all of the requisite data is housed on a singular system, there's no need for additional handoffs, introducing new opportunities for errors, or reconciling data from separate systems. It becomes the simple task of reporting all the summary on the form as dictated by IRS requirements.
According to the IRS, the 1099-K is explicitly designed for payment card and third-party network transactions. It is an "IRS information return used to report certain payment transactions to improve voluntary tax compliance."
As a third-party network, payments made via the platform are reported using the platform's Taxpayer ID, not the Remitters. The IRS requires 1099-K reporting when gross payments exceed $20,000 and 200 transactions. However, the platform provisions a downloadable 1099-K to all US payees irrespective of the number and volume of payments. Since all payments are reported and all payees are provisioned with a 1099-K to enable them to report their taxes as needed, we believe this complies with all necessary tax reporting for these payments. Similarly, Remitters can access all of their payment data for Connected Accounts as needed should they determine additional reporting is necessary.
Making Tax Reporting Simpler in 2021
Again, we are not tax consultants, and Remitters are, of course, free to report any or all of the transactions as needed on W-2s or other forms of 1099s, since the 1099-Ks do not create duplicate reporting. For much more than tax reporting, we're all anxious to put 2020 in the rear-view mirror. Consider this a thought-starter and an invitation to think about innovative ways to make things a little simpler in 2021.
Your partners, contractors, customers and your bottom line will appreciate it.