A Simple Guide to Forms 1099-NEC and 1099-MISC For Small Businesses

A Simple Guide to Forms 1099-NEC and 1099-MISC for Small Businesses

Forms 1099-NEC (Nonemployee Compensation) and 1099-MISC (Miscellaneous Information) help businesses report certain payments to the Internal Revenue Service (IRS). In general, these forms play an important role in accurate tax reporting and compliance.

As a result, understanding when and how to use each form can help small businesses avoid penalties and filing errors.

Form 1099-NEC

Generally, businesses use Form 1099-NEC to report payments made to nonemployees for services performed in a trade or business. For example, common reportable payments include:

• Fees paid to independent contractors

• Commissions paid to nonemployee salespersons

• Payments made to attorneys

• Payments for services performed by nonemployees

When a Payment Qualifies as Nonemployee Compensation

To qualify, a payment must meet all of the following conditions:

• First, the business paid a nonemployee

• Next, the payment covered services performed for a trade or business

• Additionally, the payment went to an individual, partnership, estate, or certain corporations

• Finally, total payments reached $600 or more during the year

In contrast, employers must withhold income and FICA taxes when they pay employees. However, Section 530 of the Revenue Act of 1978 allows businesses to treat certain workers as independent contractors for withholding purposes. To qualify, the business must properly file Form 1099 for each worker paid $600 or more.

Nonemployee Payments Reported on Form 1099-NEC

When these conditions apply, businesses must report the following payments as nonemployee compensation:

• Professional service fees, including payments to attorneys, accountants, architects, contractors, and engineers

• Fee-splitting and referral fees

• Witness and expert witness fees

• Payments for services, including parts and materials

• Commissions paid to nonemployee salespersons

• Fees and reimbursements paid to independent contractors

• Payments to nonemployee entertainers

• Service exchanges between individuals or businesses

• Taxable fringe benefits provided to nonemployees

• Oil and gas payments for working interests

• Director’s fees

• Insurance salesperson commissions

• Lottery ticket sales commissions

• Golden parachute payments

• Entertainment facility expenses

• Payments made under Section 530 employee classification

• Transportation service payments, including taxicab and limousine drivers

Form 1099-MISC

By comparison, businesses use Form 1099-MISC to report miscellaneous income that does not qualify as nonemployee compensation. Specifically, reportable payments include:

• Royalties and broker payments of $10 or more

• Rents and prizes of $600 or more

• Other income payments

• Medical and health care payments of $600 or more

Payments Excluded from Form 1099-MISC

However, do not report the following payments on Form 1099-MISC:

• Payments to corporations, including LLCs taxed as corporations

• Payments for merchandise, telephone, freight, or storage

• Wages paid to employees

• Payments made to tax-exempt organizations

Who Must Prepare and Issue Forms 1099?

In general, any business or nonprofit that makes payments in the course of a trade or business must prepare and issue Forms 1099. That said, this rule does not apply to most payments made to corporations, including S corporations.

For example, exceptions include:

• Medical and health care payments

• Cash payments for fish purchased for resale

• Gross proceeds paid to attorneys

• Substitute payments in lieu of dividends or tax-exempt interest

Additionally, businesses must report payments made to an LLC for services unless the LLC elected corporate tax treatment or is fully owned by a corporation.

Filing Due Dates

Importantly, businesses must provide Forms 1099 to recipients by January 31 of the year following the calendar year reported.

Penalties

Unfortunately, the IRS may assess penalties for failing to file Forms 1099 or for reporting incorrect or missing taxpayer identification numbers. To avoid issues, businesses should collect accurate recipient information using Form W-9 or Form W-8 for foreign individuals.

In summary, if you need help determining your 1099 filing requirements, contact us to discuss your compliance obligations and next steps.