Payee, payor, payer – what’s the difference? Let’s break down these designations so you can distinguish who pays what on your taxes and transactions.
Payee
The “ee” suffix can be confusing for many, and that’s why we wanted to walk through the definition of payee with you today. The “ee” usually denotes that the role in question is the receiver of the action. For example, if your business or industry wants to honor you at a conference with an award or other accolades, you would be the honoree.
Therefore, the payee is the party that will receive payment in exchange of products or services. You can have a single payee in a transaction or there can be multiple. For example, when you receive a tax refund, for your personal or business taxes, you are the payee. The IRS is providing the payment, and you are receiving it.
Designating your role as payee also often means identifying whether the transactions are subject to income or other taxes – the payee in a retail transaction (the business) will have to pay tax on that revenue, for example.
Investment management transactions (with retirement or other investment-focused accounts) will often include payee accounts where the business will receive payments for the benefit of a client’s separate account.
Payor/Payer
Conversely, if the payee is the one who receives the payment, then the payor (or payer) is the one providing or sending out that payment. When it comes to payor vs. payer, the only true distinction is that “payor” is the preferred spelling for legal documents and instances.
For tax purposes, the payor is the payment provider. Some examples of payors would be an employer paying their workers, a person writing a check, and any other entity that is settling a financial obligation.
Where It Gets Tricky
For many businesses, individuals, and independent contractors, transactions and tax relationships can get complicated quickly. Miscommunication abounds in many areas of business, and that’s why creating clear language surrounding the roles and requirements of each party is so important.
We already talked about how, for payments, the payee is the one receiving the payment (or being paid) and the payor is the one sending or giving that payment to the payee.
But that’s not always the case. For example, in an exchange of goods, services, and other valued items, the payee is the one giving the item, and the payor is the one receiving it. You can learn more about these distinctions (and check out several helpful examples) in this Finance Tuts article.
And, like many business tax items, there’s often a payee or payor situation that is reciprocal – which means there isn’t just one payee or payor. Sometimes, both parties in the transaction or relationship have certain obligations to pay (payor) or obligations to request and record payment (payee).
This distinction is also important when it comes to individuals operating as businesses, like freelancers and independent contractors. If your business paid a contractor to write blogs, pour concrete, or provide any other type of product or service, they are the payee, and your business is the payor.
There is no default setting that designates businesses must be payees and individuals must be payors. It’s important to look at each payment, transaction, or business dealing individually and determine what your business’s role and the accompanying obligations are, tax-wise.
Questions about Taxes? eFile360 Can Help
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Whether you are a payee or payor, you can get a head start on your taxes when you sign up for a free eFile360 account today.