One of the challenges of running a business is keeping track of all the laws and requirements that businesses must follow when it comes to reporting their expenditures, such as maintaining a record of deductible business expenses and filing essential tax forms for any workers, suppliers, or contractors who provided your company goods or services throughout the year.
Today we will be talking about form 1099-NEC. In this article, we will explain:
- What is the purpose of forms 1099-NEC and 1099-MISC?
- Who do you have to send a 1099-NEC or 1099-MISC to?
- How do you know if the contractor’s LLC requires a 1099-NEC/1099-MISC?
- When are 1099-NEC and 1099-MISC due?
- What if you file a 1099 form for a contractor that doesn’t require one?
- Are there penalties for missing or not filing the 1099-NEC or 1099-Misc?
What is the purpose of forms 1099-NEC and 1099-MISC?
The forms 1099-NEC and 1099-MISC must be submitted to the IRS by business owners to create an official record of payments made to non-employees (independent contractors/vendors) during the tax year. The NEC stands for Non-Employee Compensation, and MISC stands for Miscellaneous. These forms function the same way as a W-2 form for employee wages, but it provides the IRS documentation showing that employees who are not classified as employees were paid. These forms also help legitimize your payment to the contractor and/or vendor in case of an audit from the IRS.
Who do you have to send a 1099-NEC or 1099-MISC to?
Generally, any time your firm purchases more than $600 in goods or services from a single individual or limited liability company (LLC) during a year, you must send a 1099-NEC form to the individual or LLC.
If the $600 or more was paid for rent, legal settlements, prizes, or award-winnings, you must send the individual or LLC a 1099-MISC.
Yes! there is always an exception to the rule; in this case, not all LLCs are required to receive a 1099-NEC and/or 1099-MISC. If the LLC you paid is taxed as a single member or partnership, you should file a 1099-NEC and/or 1099-MISC for them. If the LLC is taxed as a corporation or S-corporation, then they generally do not have to receive a 1099 form unless you pay the S-corp for the following:
- Medical and health care expenses
- Substitute payments in lieu of dividend or tax-exempt interest
- Gross proceeds paid to an attorney
Remember that employees are not part of this category. Therefore, they do not receive a 1099-NEC nor a 1099-MISC; they will receive a W2.
Not sure if you have employees or contractors? Read this article Contractors vs Employee, How to Know Which is Right For Your Business.
How do you know if the contractor’s LLC requires a 1099-NEC/1099-MISC?
I figured you’d ask! You should have each contractor or vendor fill out and sign the IRS form W-9 before making any payments to them. This document provides you with all the data you’ll need to know whether or not they’ll require a 1099-NEC/1099-MISC.
In my experience, requesting a W-9 before making the first payment to the contractor is considerably easier than tracking them down at the end of the year.
When are 1099-NEC and 1099-MISC due?
All 1099-NEC must be sent to contractors and vendors by January 31 each year, and copies must be submitted to the IRS and the state (if applicable) by the same January 31 of each year (if filing electronically).
1099-MISC must be sent to contractors and vendors by January 31 of each year, and copies must be submitted to the IRS and the state (if applicable) by March 31 of each year (if filing electronically).
What if you file a 1099 form for a contractor that doesn’t require one?
If your contractors fail to complete their Form W-9 correctly or do not file a W-9 on time, you may end up owing money. If you are unsure whether or not your contractors should be issued a 1099 form, it is often best to just submit the correct 1099 form for them.
If it turns out your contractors did not require the 1099 form, you will not be penalized for submitting the form, it will just be additional information but nothing more.
Now, you mustn’t send the wrong form; if the contractor requires a 1099-MISC and you send a 1099-NEC, this will need to be corrected right away; otherwise, the income type reported to the IRS will cause a discrepancy in the contractor’s tax return and can trigger an audit for both the contractor and your business.
Are there penalties for missing or not filing the 1099-NEC or 1099-Misc?
The answer is YES! If you miss the deadline, you will have to pay a fine depending on how late the filing is. The following are some of the penalties that may be imposed for each missing 1099:
- $50 if you file within 30 days
- $110 if you file more than 30 days late but before August 1
- $270 if you file on or after August 1
- $550 If Intentionally neglecting to file
If you cannot file on time, the IRS will calculate your penalty based on when you submit the correct information return. You can apply for an extension by submitting Form 8809 to the IRS if you cannot file on time. However, by January 31, contractors must receive 1099-NEC or 1099-MISC forms from you.
Business compliance is not always fun, but it needs to be done to be in regulation and avoid unnecessary fines… And that is where I come in because I am all about saving you from headaches and money-wasting practices. No more paying fines when I am around!
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Cheering you on,