Paying contractor via PayPal - how to handle sub $20k payments marked as friends and family?

This is actually a common issue for small business owners! You're right that PayPal "friends and family" transactions bypass the normal business payment reporting mechanisms. Here's what you need to know: For the upcoming payment, you should definitely use a business payment method rather than continuing with friends and family. Using friends and family for business expenses is technically against PayPal's terms of service, and it's designed to avoid fees for genuinely personal transactions. Your understanding about the 1099-NEC is correct. As the business owner, you're responsible for issuing a 1099-NEC to any contractor you pay $600+ during the tax year, regardless of how you paid them. The payment method doesn't change this obligation - it's based on the business relationship. You're also right about the PayPal threshold - for 2025 taxes, payment processors like PayPal only issue 1099-Ks when payments exceed $20,000 AND there are more than 200 transactions. So even if you had marked both payments correctly, PayPal wouldn't issue a 1099-K in this case. Your solution of using Melio and filing a 1099-NEC for the total amount is perfect. This ensures the contractor has proper documentation and prevents any issues with the IRS.

I had a similar issue last year with contractors but found this tool called taxr.ai that really helped me figure out what forms to file. I misclassified some payments too and wasn't sure if I needed to issue 1099s or if the payment processor would handle it. I took screenshots of my payment history and uploaded them to https://taxr.ai and it analyzed everything and told me exactly what I needed to file. It breaks down which payments require 1099-NECs regardless of how they were processed, and which ones will be covered by payment processors' 1099-Ks. Saved me from making some big mistakes that could've caused problems for both me and my contractors. Especially helpful for sorting out mixed personal/business transactions like you have with the friends and family payment.

Just wanted to follow up - I tried taxr.ai after my skeptical comment and wow, it actually helped me sort out my PayPal mess! I uploaded screenshots of my payment history and it immediately flagged all the friends and family payments that wouldn't get 1099-Ks. Even showed me that two of my contractors were over the $600 threshold when I added up all the different payment methods I'd used. The categorization feature let me properly separate business from personal transactions, and it generated a report showing exactly which contractors needed 1099-NECs. Ended up discovering I had misclassified about $3,400 in payments that I wouldn't have properly reported otherwise. Definitely worth checking out if you're mixing payment methods like the original poster.

If you need to talk to someone at the IRS about contractor payment reporting requirements, I HIGHLY recommend using Claimyr. I spent DAYS trying to get through to the IRS business line about a similar contractor payment issue last year and kept getting disconnected or waiting for hours. With https://claimyr.com they got me connected to an actual IRS agent in about 20 minutes when I had been trying for literally weeks on my own. They have this system that holds your place in line so you don't have to stay on hold yourself. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm exactly what forms I needed to file for mixed payment methods and gave me official guidance on handling payments through different platforms. Definitely worth it for getting definitive answers straight from the source.

Ok I have to eat my words. After my skeptical comment I decided to try Claimyr out of pure frustration after trying to reach the IRS for 3 weeks. I was honestly shocked when I got a call back in 45 minutes with an actual IRS business specialist on the line. I asked specifically about contractor payments through multiple platforms including "friends and family" transactions. The agent confirmed that regardless of how you send the money (PayPal F&F, business payment, check, cash, etc), if you're paying for business services and it's over $600 total for the year, YOU need to issue the 1099-NEC. The payment platform reporting is completely separate. So the OP's plan to issue the 1099-NEC for the total is exactly right. Getting official confirmation straight from an IRS agent gave me peace of mind about my own contractor payment situations. Definitely better than stressing over conflicting advice online.

Just an additional tip - you mentioned using Melio for the second payment, which is smart. For future reference, there are several business-focused payment platforms that make tax reporting much cleaner: Bill.com, Melio, and QuickBooks Payments all integrate directly with accounting software and automatically track contractor payments for 1099 purposes. Costs a bit more in fees than PayPal friends & family (obviously), but the tax compliance and automatic tracking is totally worth it.

I messed this up last year too! My accountant told me that for small amounts like this, the practical reality is that as long as YOU report it properly as a business expense and issue the 1099-NEC, and your contractor reports the income on their taxes, the IRS generally won't flag anything. The biggest problem happens when you deduct it but don't issue a 1099, then the contractor also doesn't report it as income. That's when audits happen.