Does Square Payroll report my income directly to the IRS?

Square Payroll definitely reports to the IRS! They handle all the required tax reporting for both employees and contractors. For employees, they'll file Forms 941 (quarterly) and W-2s (annually). For contractors, they generate and file 1099-NECs. As the business owner, Square will create your W-2 if you're set up as an employee of your own business, or they'll generate a 1099-NEC if you're taking owner draws as a contractor. Either way, the income gets reported to the IRS.

I struggled with the exact same question last year when setting up payroll for my photography side business! I discovered taxr.ai (https://taxr.ai) which was incredibly helpful for figuring out all the tax reporting requirements. I uploaded my Square Payroll reports and it analyzed everything, showing me exactly what Square was reporting versus what I needed to handle. Saved me from a potential audit nightmare because I was about to double-report some income!

Guys I tried taxr.ai after reading about it here and it was exactly what I needed! I uploaded my Square reports and it showed me that Square had already filed my contractor 1099s but I still needed to report my business income on Schedule C. It even showed me which expenses Square wasn't tracking that I could deduct. Super clear explanations for a tax newbie like me!

After struggling with Square Payroll tax questions for MONTHS and getting nowhere with their customer service, I finally got through to an actual IRS agent using https://claimyr.com (check out their demo: https://youtu.be/_kiP6q8DX5c). The agent confirmed exactly what Square reports and what I'm still responsible for. Turns out Square was reporting my business income correctly but I was still making a mistake on my quarterly estimated payments.

I'm eating my words right now. After being totally skeptical about Claimyr, I tried it yesterday out of desperation after Square sent me a tax notice I didn't understand. Got connected to an IRS agent in about 45 minutes (while I was watching Netflix, not sitting on hold). The agent walked me through exactly what Square had reported for my business and confirmed I needed to amend my return. Honestly shocked at how well it worked.

Be careful with Square Payroll! They do report to the IRS but in my case they messed up my 1099-NEC amounts for 2023 and reported about $2,300 more than I actually paid to one contractor. Had to file corrections and it was a huge headache. Double-check everything they report!!

Square definitely reports to IRS! I learned this the hard way when I didn't report some Square income thinking they didn't report it (I was using a different service before that didn't). Got a lovely CP2000 notice from the IRS about underreported income. If u use Square, they report EVERYTHING!

Thanks everyone for the detailed responses! This is super helpful. I'm realizing I need to be way more careful about understanding what Square handles vs what I'm responsible for. @James Johnson your story about the 1099 error is exactly what I'm worried about - I definitely need to review everything they generate before it gets submitted. For now it sounds like I should: 1) Make sure I understand my business structure (sole proprietor vs employee), 2) Review all Square tax forms during their review period, and 3) Still file Schedule C for my business income/expenses regardless of what Square reports. Really appreciate everyone sharing their experiences - this stuff is so confusing when you're just starting out!

Great question! As a small business owner myself, I went through this exact confusion when I started. Square Payroll does report to the IRS, but there are some important nuances depending on how you're set up. Since you mentioned you're running a home bakery and you're the only "employee" right now, you'll want to clarify your business structure first. If you're a sole proprietor paying yourself through Square as a contractor (1099-NEC), Square will report those payments to the IRS, BUT you'll still need to file Schedule C to report your total business income and expenses - this includes income from sources beyond just what you pay yourself through Square. If you've set yourself up as a W-2 employee of your own business, Square will handle payroll taxes and report your wages, but again, you'd still need to report the business's overall income and expenses. The key thing to remember is that Square reports what they process, but as the business owner, you're responsible for reporting ALL your business income (even cash sales, other payment processors, etc.) and claiming your business deductions. Square's reporting is just one piece of your overall tax picture. I'd recommend downloading copies of any tax forms Square generates during their review period and keeping detailed records of all your business income and expenses separate from what flows through Square Payroll.

For Square's tax form review process, you'll typically get email notifications when forms are ready for review (usually in late January for W-2s and 1099s). You can also check in your Square Dashboard under "Payroll" > "Tax Documents" - there's usually a section for "Year-end forms" where you can preview everything before it gets filed. The review period is usually about 2-3 weeks in January before Square submits to the IRS, so mark your calendar! During this time, you can catch any errors like the 1099 issue @James Johnson mentioned. Since you're sole proprietor taking cash at farmers markets, definitely track that income separately - I use a simple spreadsheet with date, amount, and source. That cash income goes on your Schedule C but obviously won't show up in Square's reporting. The IRS expects you to report ALL business income, not just what flows through processors. One more tip: if you do hire part-time help next year, get clear on worker classification BEFORE you start paying them. The IRS has a 20-factor test for employee vs contractor status, and getting it wrong can mean back taxes and penalties. Better to set it up correctly from the start!