1099s are misunderstood and underemphasized. Businesses are required to issue a Form 1099 to each third party to whom they have paid at least $600 in rents, services, prizes and awards, or other income payments.
- Form 1099-NEC was first introduced for the year 2020 year, and is only used to report nonemployee compensation (NEC).
- Form 1099-MISC is used to report other payments such as rents, royalties, prizes, or awards paid to third parties.
These two type of 1099s are unpopular on both sides of the table: individuals aren’t eager to receive a 1099 and most companies are not anxious to issue 1099s. 1099s are important because they help achieve balance – so that the deductions business take for payments to independent contractors are, in turn, reported as income by the recipients of the payments.
Correctly issuing 1099s can be a minefield and errors commonly occur.
Read on for questions and answers that address common issues surrounding 1099-NEC and 1099-MISC.
What are common errors on 1099-MISC and 1099-NEC?
- Not issuing any 1099s at all
- Not issuing 1099s to all eligible recipients
- Not issuing 1099s to certain vendors because you didn’t get a completed W-9 (always get this prior to the first payment!)
- Misclassifying employees as independent contractors and issuing them 1099s, when they should be issued a W-2
- Using the wrong form (reporting nonemployee compensation on Form 1099-MISC, instead of the new Form 1099-NEC)
- Not including payments to independent contractors paid by cash or trade
- Incorrect amount reported
- Incorrect or missing vendor mailing addresses
- Incorrect or missing taxpayer identification numbers, either Employer Identification Number (EIN) or Social Security Number (SSN)
- Mismatching Names and Taxpayer Identification numbers (Individual name used with Business EIN, or Business name used with individual’s SSN)
- Including payments made by credit card
- Including payments that did not clear the bank
- Reporting payments in the wrong box on the Form 1099
Who gets a 1099-NEC?
1099-NECs should be issued to workers who are not on payroll, if they are paid more than $600 in one year for services performed for business purposes. This applies to payments for services, but does not apply to physical goods purchased. Recipients include individuals, independent contractors, freelancers, sole proprietors, self-employed individuals, third-parties, attorneys, and certain businesses that are providing services. Examples: janitorial, legal, consulting, handyman, and landscaping service providers. There is no penalty if you file a 1099-NEC that is not required, if the information reported is accurate. However, penalties can be assessed for not filing a required 1099-NEC. 1099s are generally mailed directly to recipients at their home or business. The due date for providing recipient and IRS copies of 1099-NEC is January 31st.
Who gets a 1099-MISC?
The 1099-NEC was new for the 2020 year, replacing Box 7 of Form 1099-MISC. The 1099-MISC form is still in use for other purposes. In general, a person will now receive 1099-MISC to report payments that are not subject to self-employment taxes. Example: an individual who earns an honorarium for a one-time speaking event. Other examples: rents, royalties, prizes, and awards paid to third parties. The due date for providing recipient copies of 1099-MISC is January 31st, and IRS copies are due February 28th (or March 31st if e-filing).
Who does not get a 1099-NEC or 1099-MISC?
- Corporations – C Corps and S Corps
- Vendors paid for physical goods only
- Vendors paid by an individual for non-business services
What information do I need to complete a 1099?
Tracking 1099 vendors and reportable payments can be a challenge, so be proactive when on-boarding new vendors and recording payments in your accounting system, with the end in mind.
Most of the information needed to a 1099 can be gathered with a Form W-9 Request for Taxpayer Identification Number and Certification completed by your vendor. Always obtain the completed Form W-9 before you issue payments to any vendor who may require a 1099.
Aside from the W-9 information, your accounting books and records, in conjunction with our vendor invoices, should provide the necessary information on the type of 1099 form required and the dollar amount to be reported as paid to the vendor.
Important Note: Payments made in cash or by check are reportable on Forms 1099-NEC and 1099-MISC, however, payments made by credit card are not. (The credit card processor is responsible for reporting payments made by credit card on Form 1099-K.)
1099s may not be highly anticipated by the recipient or the payer, but filing complete and accurate 1099s is required and important in business world.
Call on our Client Accounting and Advisory Service experts for outsourcing your 1099 tracking, preparation and filing needs.