How do you report 1099 Income for someone when all they did was turn around and donate their income? We never really cut their check; we just did a journal entry as they requested.

Without knowing all of the details, it sounds as if this would be an instance where we would recognize Gift-in-Kind income and an expense. Rather than pay the individual for their services, we would recognize their donated services as a gift (credit) and offset it to the expense that would have been used had we purchased the service outright (such as Repairs and Maintenance). The individual performing the services does not receive a 1099. However, they do receive a gift acknowledgement for the fair market value of their services.

We do this 2-3 times a year. We create a vendor record (if it doesn't already exists) and go to Vendor -> 1099 amounts and enter the adjustment there. No check is cut, no expense is realized (do that with a JE if you want). Just a clean 1099.

I'd be careful about giving receipts for services in that manner. The IRS is fairly picky about giving gift credit for services rendered without acknowledging the income to the donor. For example, if I go to my church and perform computer services, get paid $500 and then give the $500 back to the church, I have $500 on a 1099 plus a donation of $500. They offset on my tax return. However, if I do the work and only get a gift credit for $500, my tax return shows a net reduction of $500. I can't deduct something I never had. The IRS frowns on it.