A Simple Guide to Forms 1099-NEC and 1099-MISC For Small Businesses
Forms 1099-MISC, Miscellaneous Information and 1099-NEC, Nonemployee Compensation are used to report various types of payments to the Internal Revenue Service (IRS). These forms are essential for individuals and businesses to accurately report certain payments and comply with tax regulations.
Form 1099-NEC
Form 1099-NEC is used to report nonemployee compensation (NEC) for services performed in a trade or business, including:
- Fees paid to independent contractors, commissions paid to nonemployee salespersons, payments made to attorneys, payments for services performed by non-employees.
The following conditions must be met for a payment to be reportable as NEC:
- The payment was made to a nonemployee the payment was made for services rendered to a trade or business, was made to an individual, partnership, estate, or corporation in certain specific cases, and totaled $600 or more during the year.
Generally, if a payer engaged in a trade or business pays wages to an employee, the payer must withhold income and FICA taxes and also pay their employer portion of FICA. For a payer to avoid wage withholding requirements that apply to certain workers, section 530 of the 1978 Revenue ACT (Section 530 relief) allows independent contractor treatment for wage withholding purposes. For the relief, a business must have properly filed an adequate form 1099 for any worker who was paid $600 or more.
In as much as they meet the conditions described in this article, the following payments must be reported as Nonemployee Compensation (NEC) on Form 1099-NEC:
- Professional services fees: Payments to attorneys, accountants, architects, contractors, and engineers.
- Fee-splitting and referral fees: Payments between professionals.
- Witness and expert fees: Payments by attorneys to witnesses or experts.
- Service payments: Payments for services, including parts and materials.
- Commissions: Payments to nonemployee salespersons.
- Fees and reimbursements: Payments to non-employees, including independent contractors.
- Entertainer payments: Payments to nonemployee entertainers.
- Service exchanges: Exchanges of services between individuals in the course of their trades or businesses.
- Taxable fringe benefits: Benefits provided to non-employees.
- Oil and gas payments: Gross payments for a working interest.
- Director’s fees: Payments to members of the board of directors.
- Insurance salesperson commissions: Payments to licensed insurance salespersons.
- Lottery ticket sales commissions: Payments to licensed lottery ticket sales agents.
- Golden parachute payments: Payments made to non-employees.
- Entertainment facility expenses: Expenses incurred for the use of an entertainment facility.
- Section 530 employee payments: Payments to employees classified under Section 530.
- Transportation service payments: Payments to drivers of taxicabs, limousines, tour buses, and other types of transportation.
Form 1099-MISC
Form 1099-MISC is used to report miscellaneous income, including:
- 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.
The following payments are excluded from Form 1099-MISC:
- Payments made to corporations, including an LLC that has elected to be classified as a corporation for federal tax purposes, payments for merchandise and services such as telephone and freight, wages paid to employees, payments to tax-exempt organizations.
Who Must Prepare and Issue Forms 1099?
Any payer who makes payments during a trade or business, including nonprofit organizations must prepare and issue Forms 1099. This does not include payments made to corporations, including S corporations unless they are medical & healthcare payments, cash purchases for fish for resale, gross proceeds paid to attorney or substitute payments in lieu of dividends or tax exempt interest.
Payments to LLC for services performed by LLC should be reported unless the LLC has elected to be treated as a corporation for federal tax purposes or unless if it is fully owned by corporations.
Filing Due Dates
Forms 1099 must be furnished to recipients by January 31 of the year following the calendar year for which the form is required.
Penalties
There are penalties for failure to file Forms 1099 or filing Forms 1099 with incorrect or omitted taxpayer identification numbers. To avoid these penalties, it is essential to collect accurate identifying information from recipients using Forms W-9 or W-8 in case of payment to a foreign individual.
Please contact us to discuss if you need to comply with form 1099 filing requirements.
