For businesses across America, it’s that time again to think about the necessary IRS paperwork. But there have also been some changes, as should be no surprise.
One is regarding the 1099-MISC form. Traditionally this has been used to report contractor income. But now businesses will have to use the 1099-NEC form (it is short for “non-employee compensation”). This is actually something that was used about 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 deal with the deadlines. Note that a 1099-MISC form also includes income for rents, prizes/awards, medical payments and so on.
The good news is that if you are familiar with the requirements for the 1099-MISC form, then the new one will not be much different. So let’s take a look.
First of all, here are the main requirements for filing a 1099-NEC form:
- The payment–which was made to a contractor–must be at least $600 for the tax year. The amount is reported on Box 1 of the 1099-NEC form.
- The payment was made for services for your business. Thus, it cannot be for personal activities, such as having someone repair your home. But the payments can be made to government agencies and nonprofits.
- They payment must be for an individual, partnership, estate or corporation. Although, there is an exception–that is, if the entity is a C corporation or S corporation.
Note that there are some other times when you need to file a 1099-NEC form, which are not as common. They include the following:
- A payment of at least $10 for royalties.
- Withholding of any federal income taxes for backup withholding for employees.
If you are required to file a 1099-NEC form, then the deadline is January 31st. You will send Copy A to the IRS and Copy B to the contractor—and these can be filed by mail or e-filed. There also may be an extension granted for the deadline if there is a qualified hardship.
Besides the filing of the 1099-NEC form, you will also need to have the payee fill out and sign a Form W-9. This is to get the correct Tax Payer Identification Number (TIN), like a Social Security Number.
Now one of the toughest parts about determining whether to file a 1099-NEC form is whether the payee is a contractor or not. The requirements can be ambiguous. Just look at the litigation that companies like Uber and Lyft have waged on this matter!
As for the IRS, it does provide some guidance. The general definition for a contractor is a person that has the “right to control or direct only the result of the work and not what will be done and how it will be done.” The IRS does give some examples, such as the following:
- Commissions to sales people that have repayment terms but have not been repaid during the tax year.
- Fees for professional services like legal and financial advice.
- Fees among professionals, say for referrals.
If a contractor is disqualified by the IRS, the consequences can be severe. You may be subject to harsh fines, penalties and back taxes. In other words, if you have any concerns or questions, its probably a good idea to seek the advice from an attorney or CPA.