Question of the Week
Lessons from the 1099-NEC Deadline
Happy Friday all,
What. A. Week! We passed our first tax deadline of many with the 1/31 Information Returns deadline. For most business owners, that meant filing your 1099-NECs.
One of the things I love about working with taxes is that I continue to learn new things every year as I get lots of questions about the process. So I figured it would be good to review the 1099-NECs and discuss some lessons learned that can help you in the future.
Form 1099-NEC isn’t new, but before Tax Year 2020, the IRS hadn’t used it since 1982. The IRS is bringing it back as a dedicated form for reporting self-employment income instead of line 7 of Form 1099-MISC.
You use form 1099-NEC if you’ve made payments totaling $600 or more to a nonemployee service provider, such as an independent contractor. Similarly, if you’re self-employed, you’ll likely have some of these coming your way if you were paid over $600 in nonemployee compensation.
Filling out the form
The IRS gives four conditions under which you must generally report a payment as nonemployee compensation:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
- You paid to an individual, partnership, estate, or, in some cases, a corporation.
- You made payments to the payee of at least $600 during the year.
Form 1099-NEC isn’t just for fees paid to service providers. It can also report benefits, commissions, prizes, and awards for service performed by a nonemployee and the general catchall of “other forms of compensation for service performed for your trade or business by an individual who is not your employee.”
Additionally, you will need to file Form 1099-NEC
If you’ve paid an individual at least $10 in royalties, or
If you’ve withheld any federal income tax under the backup withholding rules regardless of the number of payments for the year to the nonemployee.
You’ll need the payee’s
- Taxpayer identification number (you can use their social security number or employer identification number)
- The amount that you paid them, as well as any federal or state tax withheld.
The easiest way to keep this information on file is by using Form W-9. I suggest asking your contractor to complete and submit this form when they start working for you, as long as there’s any chance you’ll be paying them more than $600 per year. Get it done early, and you won’t have to scramble for information a few days before the deadline.
While helpful, a W-9 is not required. You may incorporate a substitute Form W-9 into other business forms you customarily use. However, the certifications on the substitute Form W-9 must clearly state (as shown in Part II of the official Form W-9) that under penalties of perjury:
- The payee’s TIN is correct,
- The payee is not subject to backup withholding due to failure to report interest and dividend income,
- The payee is a U.S. person, and
- The FATCA code entered on this form (if any) indicating that the payee is exempt from FATCA reporting is correct.
Tricks of the Trade and Lessons Learned
Here are a few tips to make the process as easy as possible.
You can download the PDF of the 1099-NEC, but do not print and file a copy of what you downloaded from the IRS website. Instead, you must order forms from the IRS website or file online using the IRS Filing Information Returns Electronically (FIRE) system. You can also use a third-party provider like Yearli, efile4biz, or your bookkeeping software like QuickBooks or Wave.
You must file 1099-NEC forms online for 2022 if your business has ten or more W-2s or 1099-NEC forms to file.
If you need more motivation, remember the IRS can penalize you for not filing the forms on time. The penalties range from $50 to $270 per 1099 for small businesses with average annual gross receipts of $5 million or less for the most recent three taxable years. The amount of the penalty is based on when you file the correct information return, as follows:
- $50 per 1099 if you file within 30 days of the due date; maximum penalty of $194,500
- $110 per 1099 if you file more than 30 days after the due date but by August 1; maximum penalty of $556,500
- $270 per 1099 if you file after August 1; maximum penalty of $1,130,000
- If you intentionally disregard filing the form, the penalty is $550 per 1099, with no limitation.
Don’t forget that there are some people, even if you pay $600 or over, that you still don’t need to send a 1099-NEC. They include:
- A corporation – S-Corp or C-Corp – unless that corporation is a medical provider or attorney)
- Anyone you paid by credit card (the merchant bank will send a 1099-K to them)
- Vendors you paid for products (1099-NECs only apply to services for your business)
But you’ll still need to send the form if you paid a vendor or contract with cash, check, or similar payments. And when in doubt, you might as well file.
Quote of the Week
“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.” – Albert Einstein
Task of the Week
I hope you got your 1099-NECs out. Missed the deadline? That’s alright; you’re human, and sometimes life happens. Just send them out as soon as possible.