When it comes to 1099s, many business owners don’t know they need to file them.
Not knowing is dangerous because the penalties add up quickly when it comes to 1099 mishaps.
With that in mind, let’s set a few things straight about 1099s, from determining who gets one to all those pesky exceptions and exceptions to those exceptions.
What is a 1099?
A 1099 form reports income that a person or entity earns throughout the year from a non-employer. There are several types, and they are used to report income to a vendor, interest income from a bank, dividends from owning stock, and more.
You complete 1099s by using information from the W-9 form that your vendors return to you. We recommend sending a W-9 form to all new vendors as soon as you begin working with them.
The IRS allows you to withhold some of the vendor’s payments (called backup withholding) until the vendor provides you with a completed W9 form. W9 forms can be found here.
Short Version
You are required to send 1099s to most non-employees who perform more than $600 of services for your business a calendar (January to December) year. You must send the completed 1099s to the non-employee and the IRS by January 31 of the following years.
What is a 1099-NEC?
A 1099-NEC is similar to a W-2.
The IRS uses this form to track the income of non-employees or contractors (independent contractors or businesses) that perform services for your business. The 1099-NEC helps ensure that all income is reported.
Note- the 1099-NEC is new to the 2020 tax year. Contractor payments were formerly reported on a 1099-MISC.
Who Gets a 1099?
Before issuing a 1099-NEC, you should determine:
- whether the person is legally an employee or an independent contractor;
- whether or not the person/business is a corporation; and
- whether your payments to the person/business exceed the $600 reporting threshold.
Determining Contractor Status
If you treat individuals who should be classified as employees as contractors, you could incur severe penalties from the IRS.
You must clearly understand who is an employee and who is an independent contractor – and treat them accordingly.
Each state may have slightly different definitions about what defines a contractor.
California has the most straightforward and strictest guidelines, meaning more individuals would be considered employees and not contractors under this test. If you can pass the California test, the individual is most likely a contractor.
To be classified as a contractor, an individual must pass the followings:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Or, as the California Supreme Court summarized it, “The worker controls when and how the work will be performed and controls all the details of the work performed.”
Verifying Business Structure
Verifying business structure is important because it can save you the hassle of having to issue a 1099-NEC.
In general, you do not need to report payments to corporations on a 1099-NEC.
LLCs are issued 1099s, unless they are taxed as S- or C-Corporations, and you can determine this status from their W-9.
Verifying Amount Paid
The 1099-NEC threshold is $600.
If your business paid $600 or more in non-employee compensation over the year, you must issue a Form 1099-NEC.
According to IRS guidance, a form 1099-NEC may be required if a company makes the following types of payments:
- Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
- Fees paid by one professional to another, such as fee-splitting or referral fees.
- Payments by attorneys to witnesses or experts in legal adjudication.
- Commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year.
- Payments to nonemployee entertainers for services.
- Exchanges of services between individuals in the course of their trades or businesses. For example, an attorney represents a painter for nonpayment of business debts in exchange for the painting of the attorney’s law offices.
- Taxable fringe benefits for nonemployees.
- Payments to an insurance salesperson who is not your common law or statutory employee.
Exceptions
As with most things related to taxes, there are, of course, exceptions. Some general exceptions to who must be issued a 1099-NEC include:
- Corporations (including LLCs or partnerships that elect to be treated as S- or C-corporations);
- this exemption does not apply to payments for legal services (any law firm or attorney—regardless of whether or not they’re a corporation—whom you paid $600 or more in fees or in gross proceeds must be issued a 1099-MISC)
- Payments for merchandise, freight, storage, telephone, or similar items
- Rent payments to/through real estate agents/property managers (you do need to issue a 1099-MISC if paying rent to a landlord)
- Wage/salary payments to employees (this includes payments to employees for business travel)
- Payments to tax-exempt organizations
- Payments made to any person or business via credit card or through PayPal; the third-party payment processor will issue a Form 1099-K
Deadlines
You must issue and mail out all 1099s to vendors by January 31.
You also must submit all 1099s to the IRS (along with Form 1096) by January 31.
Depending on state law, you may also have to file any 1099-NEC with the state.
If you have more than 250 forms to file, you must file electronically (unless you have an approved waiver); failure to do so may result in a penalty of up to $100/return.
What to Do Next
Missing tax filing deadlines can be a nightmare and a costly mistake.
Filing the wrong form or incorrect information can be just as bad.
Let us help.
At CE Accounting, our team of CPAs, bookkeepers, and support staff is here to help make sure you never miss a filing deadline – and minimize your tax obligations.
We don’t just crunch numbers and fill in forms.
We analyze your numbers to give you the best possible tax income possible.
Whether you have questions about 1099s, filing deadlines, or how to reduce your tax burden – give us a call.