What you need to know to fill out this form correctly
The Form 1099-NEC is used to report any compensation given to nonemployees by a company. The IRS has separated the reporting of payments to nonemployees from the Form 1099-MISC and redesigned it for the tax year. You must no longer use Form 1099-MISC to report non-employee compensation.
A payor must file Form 1099-NEC for each person in their business to whom the payor has paid at least $600 during the year for services performed by someone who is not the payor’s employee, for example a contractor, cleaning service or handyman. Other payments over $600 that a payor makes in the course of the payor’s business for things such as rent and “other income payments” will continue to be reported on Form 1099-MISC.
Failure to report non-employee compensation during tax filing may result in penalties from the IRS.
All businesses must file a Form 1099-NEC form for non-employee compensation if all four of these conditions are met:
- It is made to someone who is not your employee.
- It is made for services in the course of your trade or business.
- It was made to an individual, partnership, estate or corporation.
- The payments made to the payee were at least $600 or more for the year.
You can visit the IRS website to download an online copy of Form 1099-NEC.
BEST PRACTICES
During the year, if you paid independent contractors, janitorial/maintenance companies, laboratories, attorneys, accountants and other service providers (including parts & materials) who are not on your payroll, you need to obtain a W-9 and tax identification number in order to file your 1099-NEC form.
We suggest implementing a procedure to request the W-9 and tax identification number before you pay them.
On the form you will need to report the total compensation for the past tax year and any federal income tax withheld. It’s uncommon that this will be the case unless you have received a backup withholding order for that person. If your state has an income tax, include the total payment amount to that person for the year and any state tax withheld.
EXCEPTIONS
There are some exceptions to be aware of that could impact which contractors need to have forms filed. If you have specific questions, your accountant should be able to offer guidance.
- Vendors operating as S or C-Corp;
- Some LLCs , their W-9 will determine if the business is an S or C-Corp and therefore exempt
- Payments made by credit card, debit card, gift card or third-party payment networks (such as PayPal). These payments are being reported by the card issuers & third-party payment networks
- All lawyers must receive a 1099-NEC, even if incorporated
PENALTIES
Failure to report non-employee compensation during tax filing may result in penalties from the IRS. Penalties for not filing 1099s can add up quickly and vary from $50 to $110 per form depending on how long past the deadline the company issues them. If a business intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $550 per statement, with no maximum.
CWA clients with questions or concerns should contact their planning teams.
