The 1099-NEC is the form that will be needed to report independent contractor payments for calendar year starting 2020. NEC stands for Nonemployee Compensation and Form 1099-NEC is taking the place of what used to be recorded in Box 7 of Form 1099-MISC. So who gets a 1099-NEC? Typically, this form is issued to independent contractors, janitorial services, third-party accounts and any other worker paid for services who is not on the payroll. But like many IRS regulations, it’s not quite so simple. Let’s look at some factors that help determine whether a 1099-NEC is needed. 1. The payment is $600 or more for services — not physical products.The first rule of thumb is that the payment must be at least $600. If it’s less than that amount, a 1099-NEC is not required and should not be issued. 2. Services performed are for business purposes.Say you contract with a worker to remodel your office breakroom. The total comes to $5,000. You would likely issue a 1099-NEC in this case. But let’s say you contracted that same worker to remodel the kitchen in your home. Do you need to issue a 1099-NEC? The answer is no, because the kitchen remodeling was for personal, not business reasons. 3. In general, you don't have to issue 1099-NEC forms to C-Corporations and S-Corporations.It’s a common belief that businesses don’t need to send out 1099-NEC forms to corporations. And this is true. Sometimes. In general, you don’t have to issue 1099-NEC forms to C Corporations and S Corporations. But there are some exceptions, including:
You can read about other exceptions, such as cash payments for fish (yes, it’s a thing) here. 4. You contract with a business that is an LLC sole proprietorship.You will need to send out a 1099-NEC form if you’re working with an LLC sole proprietorship. An easy way to tell? Just look at the W-9 the worker provided. If the W-9 indicates they are an LLC that is taxed as a sole proprietorship, you need to send a 1099. If their LLC is taxed as an S- or a C-Corp you do not (unless an exception applies as described above). When in DoubtIf you’re unsure, it’s always best to file a 1099-NEC. There’s no penalty if you file one but you didn’t need to. On the other hand, not filing one that is required can lead to hefty penalties. And here’s a final tip: Always get the W-9 before you issue payments to any vendor who may be required to get a 1099-NEC. Less-reputable vendors might not be around when you need their information at tax time. Note: while the 1099-NEC is taking the place of a 1099-MISC with box 7 data beginning with calendar year 2020, the 1099-MISC form is still in use for other purposes, for example, for rents, payments to attorneys, and fishing boat proceeds. For additional information on the 1099-NEC form, please see the IRS site.
(updated 2/9/2022) Over the past few years, there have been a number of changes and updates regarding the reporting rules for the mysterious 1099 Forms. I say “mysterious” because many business owners simply guess as to what the rules are and oftentimes get exasperated and just give up choosing to file nothing at all. This can be a very dangerous move and result in penalties that can add up very quickly. The 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. In fact, 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 (More on this below). So now, that I hopefully have your attention. Let me break down the basics and make a couple of recommendations on how you can take care of your 1099s. The New Form and Name Changes and DeadlinesThe biggest change from last year and many don’t know about it is the introduction of a new Form called 1099-NEC Non-Employee Compensation. Also, the title and purpose of Form 1099-MISC has been changed from Miscellaneous Income to Miscellaneous Information.
The “general rule” is that business owners must issue a Form 1099-NEC to each person to whom they have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099s for payment made for personal purposes. You are required to issue 1099-NEC reports only for payments you made in the course of your trade or business. Also, don’t forget other 1099 Forms that might apply to you as a business owner or investor. I provided the links to the instructions for these other types of Form 1099s.
Here are the Basics about 1099s you should know as a Business Owner
Suggested Procedure for 2022: Moving forward this year, make sure to get a Form W-9 from all your vendors before they can get paid. If they want to get paid ‘under the table’…tell them to move to another country and tell you “Thank you for paying taxes and providing roads for me and national defense!!” Getting a W-9 from them will ensure your ultimate tax-write off and certainly save you a lot of headaches next January so you don’t have to track down their mailing addresses or EINs. (See here the Instructions for the W-9). What are the Penalties if I miss a Deadline?As I mentioned above, penalties for not filing a correct 1099 can add up quickly and vary from $50 to $110 per Form depending on how long past the deadline. Moreover, if the IRS can prove that a business intentionally disregarded the requirement to provide a correct payee statement, they are subject to a minimum penalty of $550 per statement, with no maximum! Don’t ignore the 1099 or the process and get with your CPA to make sure to meet the appropriate deadlines. The maximum penalty can easily exceed $1M for small businesses in 2022 and interest WILL be charged on those penalties. In all cases, the IRS considers you to be a small business if you’ve earned an average of $5 million or less in annual revenue for the past three tax years…AND there is no limit on the penalties for the intentional disregard to file (and don’t think ignorence is a defense)!
If you are already late in filing your forms…you have a big decision to make (think of “The Rock” in the movie ‘The Rundown’ if you haven’t seen it- a classic):
Finally, be careful trusting websites just to save just a few dollars. It can cost you big time if you miss even a small rule or procedure. Most accountants have an affordable procedure to assist in the filing and can be a huge resource. Business owners need to take this filing process seriously and take personal accountability to make sure they get completed. Shop around, but as you do just know our fee at Kohler & Eyre CPAs is $50 for the 1096 and $5.00 per 1099 before January 31st and $10.00 per 1099 after the deadline…so it doesn’t have to be that expensive. If you need support or have questions please contact Maxwell Rodgers in our office for this service at 435-865-5866 or email him directly at [email protected]. Additional Resources* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com. Mark J. Kohler is a CPA, Attorney, co-host of the Podcast “Main Street Business Podcast” and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions, 2nd Edition”. the “8 Steps to Start and Grow Your Business Workbook”, and “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You”. He is also a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP. |