It’s time again for businesses across America to start thinking about the required IRS filing. But there were also some changes, which shouldn’t be a surprise.
One concerns the 1099-MISC form. Traditionally, this has been used to report contractors’ earnings. Now companies must use the 1099-NEC form (which stands for “Non-Employee Compensation”). This is actually something that was used around 30 years ago. But now the IRS wants to revive the form and the main reason is that the agency wants to make it easier to meet the deadlines. Note that a 1099-MISC form also includes income for rentals, prizes / awards, medical payments, etc.
The good news is that once you are familiar with the requirements for the 1099-MISC form, the new one won’t be much different. Let’s look at that.
First, here are the key requirements for filing a 1099-NEC form:
- The payment made to a contractor must be at least $ 600 for the tax year. The amount is shown in field 1 of the NEC 1099 form.
- Payment was made for services to your business. Therefore, it cannot be for personal activities such as having someone fix your home. However, payments can be made to government agencies and nonprofits.
- Payment must be for an individual, partnership, estate, or corporation. However, there is one exception – that is, if the company is a C or S company.
Note that sometimes you will need to file a 1099-NEC form, which are not that common. They include the following:
- Paying at least $ 10 in royalties.
- Withholding federal income tax for withholding tax for employees.
If you must submit a 1099-NEC form, the deadline is January 31stst. You send Copy A to the IRS and Copy B to the contractor – and these can be submitted by mail or email. An extension for the deadline can also be granted if there is a qualified hardship.
In addition to submitting the 1099-NEC form, the payee must also complete and sign a W-9 form. This is to get the correct Taxpayer Identification Number (TIN) like a Social Security Number.
Now, one of the most difficult aspects of deciding whether to submit a 1099-NEC form is whether or not the payee is a contractor. The requirements cannot be clear. Just look at the litigation that companies like Uber and Lyft have had on this matter!
The IRS offers some guidance. The general definition of a contractor is a person who has the right “to control or direct only the outcome of the work, not what is done and how it is done”. The IRS gives some examples, such as the following:
- Commissions to sellers who have repayment terms but were not repaid during the tax year.
- Fees for professional services such as legal and financial advice.
- Fees among experts, e.g. for recommendations.
If a contractor is disqualified by the IRS, the consequences can be severe. You may face hefty fines, penalties, and back taxes. In other words, if you have any concerns or questions, it is probably a good idea to seek advice from an attorney or CPA.
Tom Taulli (@ttaulli) is a registered agent who is the highest designation for the IRS and operates PathwayTax, which is licensed to provide advice in 50 states.