1099 Income Paid in Jan for Dec - Income for 2020, or 2021?

[Jack H20]

Jurisdiction

Pennsylvania

My question is about whether business income is supposed to be counted as income for 2020 or 2021.

Background:

My LLC will be getting paid commissions as an independent contractor in January for activity that occurred this month. After doing some research online, e.g. paid in january for december 1099 - Google Search, my understanding is that this payment is supposed to be counted as income for 2021 and is supposed to appear on a 1099 given to me in 2022. However, when I ran this by the company that will be paying, I was told they are intending to give me a 1099 for 2020 for this income, despite paying me next month. I was pretty sure they are making a mistake with that, but didn't want to push it.

1. Aren't they making a mistake, and shouldn't the earnings really be on a 2021 1099 even though the payment is for activity that occurred this month?

2. Assuming they are making a mistake with that, even though they are making a mistake, isn't it true that their erroneously created 2020 1099 has no bearing whatsoever on what I am both allowed and even required to do with regard to what year the income is supposed to be counted for? I.e., isn't it still true that I am supposed to report the income for tax year 2021 because I will only be getting paid and only constructively receive the payment (by bank wire transfer) in 2021 despite that they plan to report it on a 1099 for 2020?

This is my understanding, that despite what they intend to do with the 1099, I am to count it as 2021 income for all official and tax purposes.

PS: the jurisdiction for this post should really be California, which is where the payor is, but I can't edit that and my understanding is that it doesn't matter because I'm talking about the national level, not just state.

 

[Tax Counsel]

1. Aren't they making a mistake, and shouldn't the earnings really be on a 2021 1099 even though the payment is for activity that occurred this month?

I assume that you are the only member of the LLC and that you have not elected with the IRS for the LLC to be treated as a corporation. I also assume you are a cash basis taxpayer. In that case the income is reported on the tax return for the year in which you actually got the money even though the work was done in the previous year.

The one exception to that is if you had constructive receipt of the money before the end of this year. Constructive receipt means that the money was available to you this year but you made the choice that delayed receiving it until the next year. For example, suppose Sam works at XYZ Corp. His pay for the previous week is available for him to pick up at the payroll office on Dec. 31, 2020 at the end of his shift. But he decides to wait and pick it up the next work day, Jan 4, 2021. Even though he didn't actually get the check in his hand until Jan. 4, 2021 Sam still has that pay as income for 2020 because he could have picked it up on Dec. 31, 2020 and thus was in constructive receipt of it..

So if you got the check in 2021 and did NOT have constructive receipt of it in 2020 you report it as income in 2021 despite what the 1099 says. Keep evidence to support the date you received the payment.

 

[Jack H20]

I assume that you are the only member of the LLC and that you have not elected with the IRS for the LLC to be treated as a corporation. I also assume you are a cash basis taxpayer. In that case the income is reported on the tax return for the year in which you actually got the money even though the work was done in the previous year.

The one exception to that is if you had constructive receipt of the money before the end of this year. Constructive receipt means that the money was available to you this year but you made the choice that delayed receiving it until the next year. For example, suppose Sam works at XYZ Corp. His pay for the previous week is available for him to pick up at the payroll office on Dec. 31, 2020 at the end of his shift. But he decides to wait and pick it up the next work day, Jan 4, 2021. Even though he didn't actually get the check in his hand until Jan. 4, 2021 Sam still has that pay as income for 2020 because he could have picked it up on Dec. 31, 2020 and thus was in constructive receipt of it..

So if you got the check in 2021 and did NOT have constructive receipt of it in 2020 you report it as income in 2021 despite what the 1099 says. Keep evidence to support the date you received the payment.

Thanks a lot. Yes indeed, single member/owner LLC, cash basis. You have confirmed my suspicions and relieved my concerns so well. This was my first stop and I don't even feel any need to seek a "second opinion" either, though my original plan was to post in a number of forums. You seem to have a teaching disposition, I wonder if you teach in college or law school just for fun. Had some law classes while doing a business minor in college many years ago. Loved them, great teacher too. Wish I'd gone to law school myself but I guess it wasn't meant to be (long story).

 

[Tax Counsel]

You seem to have a teaching disposition, I wonder if you teach in college or law school just for fun.

I was an attorney for the IRS for a number of years and during that time taught continuing education classes for IRS agents, officers, and other employees and also taught at attorney CLE courses, too, which I continued after leaving IRS.