Answers to your burning questions about the 1099 NEC
We know there can be a sense of overwhelm for new businesses during tax season. There are so many questions and sometimes not enough time to adequately know the answers. Today we tackle the 1099- NEC in depth to provide as many answers as possible!
Let’s get started!
What the heck do I do with this 1099 NEC that I received?
If you are new to the self-employment world, you may not be familiar with the 1099-NEC. The 1099 NEC is an Internal Revenue Service (IRS) form used to report all payments to independent contractors, freelancers, gig workers and the self-employed.
Receiving a 1099NEC (Non-employee Compensation) means you provided more than $600 of services to a business. Most businesses receive multiple 1099-NEC’s every year.
You will want to confirm that all of the information is correct and that the amount listed matches your records. A mistake we often see is that the 1099 is erroneously issued to the individual and should have been issued to a business. This is important because the IRS will expect to see that income on the individual’s tax return and when they don’t, they send you a bill. The IRS matches the income to the Social Security Number or Federal Employer Identification Number. They do not have enough information to connect the dots for you. If this happens, contact the issuer and request that they change the 1099. If they are not willing, you may need to file extra tax forms to account for income on the individual tax return.
The 1099-NEC will be supporting documentation for the preparation of your tax return, whether you file a Schedule C, Partnership or a S-Corp tax return. Please note that you have to claim all of your income, not just the income reported on the 1099’s.
If you are still a little confused, it may be because you did not realize that you were paid as an independent contractor and had assumed you were an employee. This happens often and is unfortunate.
If you feel that you should have been paid as an employee, make sure to read
• Publication 1779, Independent Contractor or Employee
• Publication 15-A
• Tax Topic 762, Independent Contractor vs Employee is also helpful
We have covered the information about 1099’s received, but it raises the question – do you need to prepare 1099’s for your business?
Do I need to issue 1099’s? Now that you are a business owner, the 1099 rules apply to you. There are several types of 1099’s but really only two that apply to a small business:
• 1099 – NEC – If you paid a business or individual vendors $600 or more for services provided to your business, you need to issue a 1099 – NEC. Please note that 1099’s only apply to non-employees.
• 1099 – MISC – This is where miscellaneous payments are reported, such as payments to attorneys, rent, etc.
Exceptions: There are a few exceptions that do not require a 1099 to be issued. For a complete list please see the IRS Instructions for Forms 1099-MISC and 1099-NEC (2020).
The following are the few exceptions that we see most often:
• Payments paid to corporations, including LLC’s that have elected to be taxed as a corporation.
• Payments to vendors with a credit card or PayPal. Vendors are issued a 1099 directly from the credit card company and therefore you would be double reporting if you also sent them a 1099. Please note Venmo does not meet this exception. If you paid vendors via Venmo, you WILL need to issue a 1099.
• If services have been provided by a non-citizen and all work has been performed outside of the U.S. Please see more about Foreign Workers below.
How do I get my Vendors Information, so that I can prepare the 1099?
Request a W9 from all businesses and individuals that you do business with. The W9 will give you the information you need to issue the 1099 and let you know if one is not required.
Word from the Wise: Make sure you have a completed W9 in hand before you pay them. Independent contractors are notorious for disappearing when you ask them for their social security number or Federal Employer Identification number. The only motivation they have to give you the information, is they want their money.
If you are paying Foreign Workers, they will need to complete a Form W-8BEN instead of the W9.
How do I prepare 1099’s?
Once you have the W9 for each vendor, preparing the 1099’s is fairly simple. We would use the IRS’s set of instructions to complete the 1099’s.
You will need to complete a 1096 for each set of 1099’s you mail in. The 1096 serves as summary sheet, informing the IRS what to expect. For example: If you have both 1099 – NEC’s and 1099 – MISC’s, you will need two 1096’s. The 1096 form contains the number of 1099’s, the type of 1099’s and the total amount of 1099’s that you are submitting.
We feel that this is silly to even mention, but if you have 250 or more 1099’s, electronic submission is required. Let’s face it, if you have 250 1099’s you are most likely using software to create and submit these!
How do I handle Foreign Workers?
Foreign Workers can be a touchy subject with the IRS, so make sure to verify the worker is NOT a United States citizen, and that all work has been completed outside of the U.S. You will also need to have a completed W-8BEN form on file.
What are the deadlines for submitting the 1099’s?
o 1099 – NEC’s are required to be filed with the IRS and in the mail to all independent contractors by January 31st or the following business day if the date falls on a holiday or a weekend.
o 1099 – MISC forms need to be sent to all recipients by January 31st, but are not required to be submitted to the IRS until March 1st if paper filed or March 31st if sent electronically.
Where can I get the forms?
Unfortunately, 1099’s are a bit harder to come by than simply downloading them off of the IRS’s site. You can try and snag the forms from your local office supply store, but please note that they go super-fast. You can also order them from the IRS’s site or possibly pick them up at a local IRS office. Make sure to check if the IRS office is allowing drop in’s with current Covid protocols.
Do I need to file the 1099’s with my state?
This answer depends on what state you live in and if that state participates in the Combined Federal State Filing program, also known as CF/SF program. Make sure to check in with your state on whether they will need a copy submitted.
What happens if I do not send out 1099’s?
Penalties will of course apply if you do not complete 1099’s. The IRS hits you twice; a penalty for not filing with the IRS and an additional penalty for not sending to the recipient. Penalties range from $50 – $280 for 2022. You can find out more information about penalties by going to the IRS’s website.
How do I fix a mistake on the 1099’s already submitted?
It is better to correct a mistake made versus ignoring it. The fix depends on the Type of Error. According to the IRS, you can have Type 1 or Type 2 Error. Please click on the link below to see the chart on how to correct the error.
*We highly recommend you scroll down to Page 26 of this LINK as the IRS has done an excellent job in creating this chart!
While we dove deep into everything you need to know about the 1099 NEC, we realize you may still have some questions. We are great at not only answering questions but also giving expert answers!
Please give our office a call at any time if questions arise!
You can reach our office at (717) 919-7602 or email us at firstname.lastname@example.org.