I hear lots of business owners talk about issuing 1099s or even receiving a 1099. It’s all about the 1099. Yet, many misunderstand the rules around them and what 1099 is actually for. Let’s work at understanding the 1099.
Understanding the 1099
The first thing to understanding the 1099 is that it’s used to report non-employee compensation for business services provided.
However, starting in 2020, there’s a new form on the block – the 1099 NEC.
The what!?!? The IRS wanted to confuse matters even more. Not really. They are actually simplifying things for many.
In 2020, there are two 1099 forms, the 1099 MISC and the 1099 NEC. The 1099 MISC used to cover everything including nonemployee compensation. This year the IRS decided to split some information off into a new form, the 1099 NEC.
Since there’s a lot of misunderstanding of when you need to file a 1099 form, I’m going to decode the who, what, why, and how of the 1099, a form that you might be required to file.
The 1099 NEC is replacing box 7 from the prior 1099 MISC. For 2020, most businesses will most likely only file 1099 NEC for their nonemployee compensation. In other words, if you pay a contractor during the year for services to help with your business, then you’ll need to file a 1099 NEC for them.
Let’s break it down further.
Understanding the 1099
The 1099 is a form that any and all businesses – sole proprietors, LLCs, S Corps, partnerships – are required to file at the beginning of each tax year (January) for payments in the previous year. For example, you file a 1099 in January 2021 for any payments to a contractor in 2020. It reports that your business paid money in exchange for services used in the course of your business.
If you are deducting the cost of the services on your taxes, then most likely you need to file a 1099.
The 1099 is sent to up to 3 people:
- The IRS
- The individual or business (LLC) who performed the services, and
- The state of the contractor, if required by their state
If mailing, the 1099 must be postmarked to the contractor you paid by January 31st. If you’ll be delivering it electronically, then the deadline is 2/1.
It must be paper filed with the IRS by 2/28 (3/1/21) and if efiling, the deadline to provide a copy to the IRS is 3/31.
Lots of dates to remember. I say send it to the contract by January 31 along with submitting it to the IRS and state, if required, at the same time. Then there’s no missing any deadlines.
Who do you provide a 1099 NEC?
Any individual or nonemployee you pay more than $600 for business services and who you did not pay through a credit card or PayPal. There is a lot in that sentence. Let’s break it down further.
A 1099 NEC is for a –
- Nonemployee: A nonemployee is someone who is not on your payroll or in other words, you don’t issue them a regular paycheck and pay employer taxes for this person. This is someone you contract for services. Examples include graphic designer, web developer, photographer, virtual assistant, consultant, bookkeeper, coach, etc.
- Individual: You do not send 1099s to S-Corps, C-Corps, and nonprofits. Only individuals including a sole proprietor LLC and partnerships need to be issued a 1099 NEC.
- Anyone you pay more than $600 for business services: The important part here is that if you plan to deduct the cost of the services on your taxes, then you need to file a 1099 NEC for that contractor. This doesn’t include an electrician, a dog walker, etc. unless those services specifically apply to your business and count as a business write-off.
- Anyone you paid directly: This means any contractor you paid via direct deposit, check, cash, Venmo, Zelle, etc. must be issued a 1099 NEC if they fit the above categories 1,2, 3. If you paid your contractor through PayPal, credit, or debit card, then you don’t need to file a 1099 for them. That’s because the contractor’s credit card processor will report how much money they processed in the year.
Simply put, the IRS doesn’t like it when people don’t report or under-report their income. The 1099 NEC is meant to keep people in check.
The 1099 makes people report their total income. Since the form is filed with the federal and sometimes state governments, the money is on record. If a taxpayer doesn’t report their full income, the IRS has proof that the individual is evading taxes. With computers, the IRS and states can easily catch those who underreport their income especially when a 1099 NEC has been filed.
When your tax return shows $3,200 paid in contractor services, then there most likely needs to be corresponding 1099s on file. If you are intentionally avoiding filing the 1099s, then it’s not good for you. Yes. There are fines for not filing and for filing them late.
We all have responsibilities as small business owners and one of those responsibilities is to accurately report our income and pay taxes.
How do you file the 1099s? It’s usually pretty easy to file. You can use an online service and file electronically. For a small fee these services will:
- E-file your returns with the federal government
- E-file your returns with the state government, if necessary
- Mail or email a copy to your contractors/li>
- Give you PDF copies of all your 1099ss for your records
Some good filing companies include:
- Tax 1099
- Track 1099
- Quickbooks – If you track your contractor payments throughout the year in QuickBooks Online, you can have QuickBooks file your 1099s for you. You can even invite your contractor to complete tax information via QuickBooks which simplifies the process even further.
Steps to filing a 1099 NEC
- Collect information from your contractors: Before you pay a contractor anything, you need to collect information from them. The ONLY way to do this is through a W-9 form. It is your responsibility to collect this information before you pay them anything.
Why? Because the W9 form collects the contractor’s important tax information and you need to keep the W9 on file for your records. It also tells you their business structure. Right away you’ll know if they are an S Corp and you don’t need to file a 1099 NEC for them.
2. Calculate how much you paid your contractor: Most bookkeeping software including Quickbooks, Wave, etc. make it really easy to track 1099 contractor payments. You can run a report at the end of the year showing those your business paid more than $600. That’s all the data you need – the name of the contractor and how much they were paid.
3. Complete the 1099 form: You provide the following on the 1099 NEC form.
- Your business information including FEIN (federal identification number) or Social Security Number, and address
- Recipients information – all the data necessary will be on the W9 you collected from your contractor before you paid them anything.
- The amount you paid the contractor goes in Box 1 of the 1099 NEC
How are you feeling now? Hopefully, the 1099 has gone from scary and misunderstood to I can handle this. At the very least, I hope it’s less intimidating, less mysterious, and more manageable!