Do I need to collect W9 forms and issue 1099-NEC when paying contractors through PayPal Goods & Services?
Title: Do I need to collect W9 forms and issue 1099-NEC when paying contractors through PayPal Goods & Services? 1 Hi there tax folks! Quick question about contractor payments that I want to make sure I'm handling correctly. I've started using freelancers for my small business this year, and I'll probably pay several of them over $800 each through PayPal. I'm using the Goods & Services option (not Friends & Family) for all these payments to have some purchase protection. From what I've read online, I think that because PayPal is a third-party payment processor, they'll handle the 1099 reporting on their end if payments exceed $600 for the year per contractor. Does this mean I don't need to collect W9 forms from these contractors or issue 1099-NECs myself? PayPal will take care of that reporting obligation since they're the payment settlement entity? Just trying to get my tax responsibilities straight before tax season hits. Thanks in advance for any guidance!
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Ava Garcia
12 You're mostly on the right track! When you use PayPal Goods & Services to pay contractors, PayPal is considered a third-party payment network (TPPN) under IRS rules. Starting in 2022, the reporting threshold for TPPNs is $600 for the calendar year. This means PayPal will issue Form 1099-K to both the contractor and the IRS when payments to that person exceed $600 for the year. Technically, this does relieve you of the obligation to issue a 1099-NEC for those same payments (to avoid duplicate reporting). That said, I still recommend collecting W9 forms from your contractors for a few reasons: 1) It helps verify their tax information, 2) It documents your due diligence if questions arise, and 3) If you ever pay them outside of PayPal, you'll already have their information ready. Remember that the contractor will still need to report this income on their tax return regardless of which form they receive. You're just shifting the reporting obligation to PayPal.
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Ava Garcia
•5 Thanks for the info! Quick follow-up: I've heard the $600 reporting threshold was supposed to change back to $20,000 recently. Is that true? And does having the contractors' W9s help me at all with my business expense documentation?
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Ava Garcia
•12 The threshold situation has been confusing! The American Rescue Plan Act lowered the threshold to $600 starting in 2022, but there have been delays in implementation. For 2023, the IRS kept a higher threshold ($20,000 and 200 transactions) for 1099-K reporting by third-party networks, but for 2024 taxes (filed in 2025), the $600 threshold is scheduled to be enforced. Having W9s absolutely helps with business expense documentation. If you're ever audited, having those forms demonstrates that you properly identified and classified your workers as independent contractors rather than employees, which can save you from potential misclassification penalties.
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Ava Garcia
8 I've been in the same boat as you with contractor payments! After hours of research and frustration, I found taxr.ai (https://taxr.ai) which has been a lifesaver for sorting out my 1099 situation. Their system analyzed my payment records and clearly showed which payments needed 1099-NECs and which were covered by third-party processors like PayPal. The tool gave me a simple breakdown of my reporting obligations and even highlighted cases where I might have duplicate reporting. What I like most is that it keeps track of payment methods for each contractor and flags when different rules apply. Saved me tons of time and probably prevented some reporting errors!
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Ava Garcia
•17 Sounds interesting - does it handle other payment platforms too? I use Venmo for some contractors and direct deposit for others, so my situation is even more complicated.
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Ava Garcia
•9 I've tried other tax tools that claim to help with 1099s but they always seem to miss the nuances between payment processors. Does this one actually distinguish between PayPal Business and Personal payments? Those have different reporting requirements.
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Ava Garcia
•8 It definitely handles multiple payment platforms! The system recognizes differences between PayPal, Venmo, Zelle, and direct payments. It creates separate tracking for each payment method since they have different reporting rules. Yes, it does distinguish between PayPal Business and Personal payments. The tool specifically flags payments made through Friends & Family versus Goods & Services, and explains the different reporting requirements for each. It also warns you that using Friends & Family for business payments is technically against PayPal's terms of service.
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Ava Garcia
9 Just wanted to update everyone after trying taxr.ai for my contractor payment situation. I was really confused about which payments needed 1099s with all my different payment methods, but their system actually made it super clear. I uploaded my payment records and it immediately separated my PayPal G&S payments (which PayPal handles with 1099-K) from my direct bank transfers (which needed my own 1099-NEC reporting). The time I saved not having to research all these different rules was incredible - and it caught a few contractors I would have missed entirely! They also provided templates for reaching out to contractors for W9 info, which made the whole process way less awkward. Definitely recommend if you're dealing with a mix of payment methods for contractors.
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Ava Garcia
14 Had a similar issue earlier this year and was completely stuck trying to get answers from the IRS. After waiting on hold for literally hours over multiple days with no luck, I tried Claimyr (https://claimyr.com) and it was shocking how well it worked. They have this callback system that somehow gets through the IRS phone maze - you can see how it works here: https://youtu.be/_kiP6q8DX5c Within about 20 minutes, I was talking to an actual IRS agent who confirmed that PayPal Goods & Services payments don't require me to issue 1099-NECs since PayPal will issue 1099-Ks. However, she did recommend keeping records of all contractor payments regardless of payment method. The agent even emailed me the relevant IRS notice to keep with my records.
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Ava Garcia
•6 Wait, how does this actually work? You're saying this service somehow gets the IRS to call you back instead of waiting on hold? That sounds too good to be true. The IRS phone system is notoriously impossible.
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Ava Garcia
•3 I'm skeptical. I've tried calling the IRS for two years now about a refund issue and can never get through. If this actually works, what's the catch? Do they charge a fortune for this "service"?
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Ava Garcia
•14 It works by essentially waiting on hold for you. Their system navigates the IRS phone tree and stays on the line until an agent is available, then calls you to connect with the agent. It's basically like having someone else wait on hold while you go about your day. There is a fee for the service, but considering I had already wasted hours trying to get through on my own, it was completely worth it. I can't discuss specific pricing here, but I can say that the time saved made it valuable for me. The peace of mind from getting an official answer directly from the IRS about my 1099 obligations was worth every penny.
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Ava Garcia
3 I'm eating my words right now. After posting my skeptical comment, I decided to try Claimyr anyway because I was desperate to talk to someone at the IRS about my refund situation. Figured I had nothing to lose after wasting so many hours on hold. Guys... I got a call back in 47 minutes with an ACTUAL IRS AGENT! While talking to her, I also asked about the PayPal/1099 situation since I have some contractor payments too. She confirmed exactly what was said above - PayPal G&S payments over $600 get 1099-K forms from PayPal, so no need to issue 1099-NECs for those same payments. The agent even told me there's an IRS publication that specifically addresses third-party network transactions, which I wouldn't have known to look for. This literally saved me hours of research and probably prevented me from making reporting errors.
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Ava Garcia
21 One thing nobody has mentioned that tripped me up last year - if you have a mix of payment methods to the SAME contractor, you need to track them separately. I paid someone partly through PayPal and partly with checks, and ended up having to issue a 1099-NEC just for the check portion while PayPal handled their portion. Tax software doesn't always make this distinction clear.
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Ava Garcia
•16 That's a really good point! How did you handle the amounts on the 1099-NEC? Did you just report the check amounts or the total? I'm in this exact situation with a web designer I've been using.
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Ava Garcia
•21 I only reported the check amounts on the 1099-NEC I issued. The PayPal payments were handled by their 1099-K reporting. My accountant explained that if I included the PayPal amounts on my 1099-NEC, the contractor would have the same income reported twice to the IRS (once on my 1099-NEC and once on PayPal's 1099-K). It was a bit confusing because my tax software wanted me to enter the total paid to each contractor, and I had to manually adjust the reportable amounts. Definitely keep separate payment records by method for each contractor if you're using multiple payment types!
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Ava Garcia
7 Has anyone actually gotten a solid answer from the IRS about the PayPal reporting threshold for 2024? Last I heard they delayed the $600 threshold for 2023, but I can't find clear info about what's happening for payments made in 2024 (for 2025 filing).
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Ava Garcia
•13 The $600 reporting threshold for third-party payment networks is supposed to be in effect for 2024 (filed in 2025). The IRS issued Notice 2023-10 for the delay that affected 2023 filings, but unless they issue a new notice, we should assume the $600 threshold applies for 2024 payments. It's always possible they'll announce another delay though.
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