How do I make sure I do not pay extra taxes as an independent contractor who was accidentally overpaid?

How do I make sure I do not pay extra taxes as an independent contractor who was accidentally overpaid?

by Gregory Paulding, CPA | Feb 07, 2018

I work as an independent 1099 contractor. I am contracted through an agency. The agency usually gets paid from a job, and it pays me as 1099 contractor. One time I accidentally got paid directly, including the agency’s money, so I was overpaid. How do I make sure I do not pay taxes on this extra money? I gave the money back to the agency, and they said they will give me a W-9 to show I paid them the money back. Is this correct? Or will I owe taxes on this money I had for one day?

No, you will not owe taxes on anything more than you are supposed to. The W-9 form allows you to create a Form 1099-Misc to issue to the agency for the monies turned over to the agency, thus negating the effect of the 1099 that you will receive from the customer that should have paid the agency.

Look at it this way:

If the customer were to pay the agency $10,000 and the agency were to pay a commission to the individual for $2,000, then only the $2,000 (net of any offsetting business expenses, of course) would be subject to tax on your return.

However, in your case, the customer paid you the full $10,000, bypassing the agency. Presuming that you paid the entire amount of $10,000 back to the agency, then received a $2,000 commission, you will still net to the same $2,000 received. You will receive a 1099 from the customer for $10,000, and you will issue the agency a 1099 for the same $10,000 that you paid to the agency to undo the error. Thus, the customer’s 1099 and your 1099 to the agency will offset on your return and in the eyes of the IRS.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Gregory Paulding, CPA, is president of Paulding & Associates PC in Erie, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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