Making prize payments isn’t always a straightforward process. Using third-party payment services might seem like a convenient solution for processing contractor payments, but do they leave you open to issues with tax compliance? Our team has spent a significant amount of time the past two years researching and getting expert opinions from various legal, accounting, and tax professionals on this matter. Our goal is not to give you tax compliance advice but share with you some learnings that we have amassed over this period of time for our business.
When making payments to prize winners on your own, you’re fully aware of what information you’re collecting from payees and what’s missing. If you’re sending payments through a third-party network, it can be less clear which data is collected, what data is available to you, and what forms you need to payees to fill out. When dealing with tax forms and compliance, it’s important to know your responsibilities to your prize winners and what you need to report to various tax authorities, particularly the IRS. Do you still need to have all of your contractors fill out a W9 or a W8? Should you issue a 1099-MISC if you are using a third-party payment network that may collect that information and issue a 1099-K?
When it comes to W9s and W8s, it’s best practice to always collect those forms and hold onto them for your records in case of an audit. If you are a U.S. based company making payments to a U.S. person, you will need to have that person fill out a W9. If they are not a U.S. person, they will need one of the specific versions of W8. Regardless if the information is collected by a third-party payment network, you as the payor of record need to have this information on file for compliance purposes.
If you’re making payments through a third-party network, do you still need to issue 1099-MISC forms from your prize winners? If you make payments to an individual that ends up being more than $600 in a calendar year, the payee will likely need to receive a 1099-MISC.
Third-party payment services send a 1099-K to individuals who meet the threshold of $20,000 and 200 payments. In theory, you could rely on a third-party service to collect this information. However, since you can’t be sure the correct forms and information have been collected, you can’t be sure if you are in compliance.
Ultimately, the only way to be completely compliant is to make sure your prize winners have been issued the correct tax forms is to collect the information yourself and submit the appropriate forms yourself. At the end of the day, you’re responsible to ensure that you are in compliance. While it can be tempting to rely on a third-party service to issue the correct forms to ensure tax compliance, the IRS could still hold you accountable if you’re found in violation of any and all tax regulations that affect your industry and the different service codes that apply to the relationship between you and your payees (i.e. prize winners, contractors, influencers, streamers, content creators, etc.).
The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
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