If you have been in business for at least a year you have heard of this thing called a 1099. You may have done nothing about them, you may not know what it means but others tell you to send one, or you may being doing them religiously every year and know they can be pain.
Wherever you are in that process we are going to break down everything you need to know about 1099s along with the new Form 1099-NEC for 2020.
What is Form 1099?
A 1099 is an informational filing form used to report non salary income to the IRS.
- There are over 15 different types of 1099 forms that are used for various purposes.
- Examples of other 1099 Forms:
- 1099-INT: Financial institutions are required to file this form if they pay you more than $10 in interest during the year.
- 1099-K: Issued by third-party payment processors (Ex: Credit card, PayPal, etc) if payments over the year total $20k or more.
- 1099-DIV: This form reports distributions, such as dividends, capital gain distributions, etc.
- 1099-B: Happens when you sell stock, showing the date of the sale, cost basis, etc.
- 1099-G: Used to report unemployment compensation, state tax refunds, etc.
- 1099-R: Reports a distribution from a retirement plan.
- The most common that we see business owners needing to deal with are the 1099-MISC and 1099-NEC so that is what we are discussing on this blog post.
What is a 1099-MISC vs 1099-NEC?
The 1099-NEC is new starting tax year 2020. Before this new form, contractor payments were included on the 1099-MISC.
- 1099-NEC: New form that is used to report independent contractor income. NEC stands for “non-employee compensation”. Prior to 2020 this activity would have been reported on Box 7 of the 1099-MISC.
- 1099-MISC: This form has not gone away, they have just removed the non-employee compensation from it and moved that to the 1099-NEC. The 1099-MISC will still be used for the other items including: rent, royalties, prizes/awards, etc.
- Basically if you were use to filing (or receiving) a 1099-MISC for contractors that has just moved to a 1099-NEC. Still required of course, just a new form.
- 1099-MISC from IRS Website
- 1099-NEC from IRS Website
- IRS Instructions for Both 1099-MISC and 1099-NEC
When Do I Need to File a 1099-NEC?
If you paid a contractor $600+ in a year.
- If you paid a contractor $600+ in total for a year you would need to send them a 1099-NEC. This could include an individual, company, vendor, etc. Note: This is an accumulative, so if you send three payments of $250 for a total of $750 throughout the year, a 1099-NEC would be required.
- Exceptions (1099-NEC NOT required to be filed):
- Payments to C or S Corporations
- Employees – You should be submitting a W-2 for all employees.
- Payments for merchandise, freight, or storage.
- Payments made via Credit Card or PayPal – Instead the merchant process would report those to the vendor via 1099-K.
- Note: The C or S Corporation exception does not apply for payments to attorneys for legal services.
- The person that is paying the contractor is the one that files the 1099-NEC. Here is the typical process:
- Step 1 – Collect a W9 from all contractors you pay (even if under $600, as it might get above that with future payments).
- Step 2 – If a 1099-NEC is required (see notes above) then you as the business would prepare it. All information needed to prepare a 1099 would be found on the W9.
- Step 3 – Send a copy of the Form 1099-NEC form to the contractor.
- Step 4 -File a copy of the Form 1099-NEC with the IRS.
- Note if you are contractor that has received a 1099-NEC you must report this income (of course) on your tax return. The IRS gets a copy of the same form and will match to ensure they see that income reported.
When Is The 1099-NEC Filing Deadline?
1099-NEC’s must be filed with the IRS and sent to the recipient by January 31st of the following year.
Note: If January 31st falls on the weekend it would be the next business day.
What Are The Penalties For Not Filing A 1099-NEC?
This depends on how late you are…
- File within 30 days past deadline: $50 per
- File more than 30 days late but before August 1st: $110 per
- File after August 1 or not at all: $270 per
- Intentional Disregard: $550 per
1099-MISC and 1099-NEC Summary
This article focuses on these two 1099 forms specifically, if you are looking for more information on other variations of 1099 forms, reach out to our team.
- Starting in 2020 independent contractor or non-employee compensation will be filed on 1099-NEC instead of 1099-MISC.
- Be sure to always grab a W9 from all independent contractors you pay. You never know when you may need it.
- Forms are due to both the IRS and contractor by January 31st.
- Total payments throughout the year totaling $600 or more trigger the form requirement, unless certain exceptions are met.
- Need help filing? Reach out to us or check out the software we use, Track1099.
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.