Who gets a form 1099-NEC? A Quick guide to report non employee compensation
Written by Stephanie Glanville
Stephanie Glanville is the Marketing Manager of TaxBandits. She has several years of experience with IRS tax forms and the funtionality of TaxBandits. With a passion to help business owners better understand their IRS tax forms and filing, she aims to create content that is valuable and informative.
Overview:
Form 1099-NEC, also known as the Nonemployee Compensation form, is a vital document issued by businesses to individuals or entities. It reports payments of $600 or more for services rendered by non-employees during the tax year. Unlike its predecessor, the 1099-MISC, which served as a general-purpose form for reporting various types of income, the 1099-NEC is specifically dedicated to reporting payments made to independent contractors and freelancers. This distinction is crucial for businesses and individuals to understand, as it clarifies the specific use and significance of the 1099-NEC. Keep reading to learn who qualifies to receive a Form 1099-NEC.
Table of Content:
1. Who qualifies to get a 1099-NEC Form?
2. What kinds of payments don’t require a Form 1099-NEC?
3. Meet Your 1099-NEC E-filing Requirements with TaxBandits!
Key Takeways:
- Independent contractors or freelancers who provide services to a business are usually issued a Form 1099-NEC if they have earned $600 or more for their services during the tax year.
- Form 1099-NEC must be filed for each non-employee for whom the business paid more than $600 during the tax year.
- The 1099-NEC form is specifically intended for independent contractors, janitorial services, third-party accounts, and any other workers compensated for services but not on the payroll.
1. Who qualifies to get a 1099-NEC Form?
The 1099-NEC Form is typically issued to independent contractors, third-party vendors, and other workers who are paid for services but are not on the payroll. The IRS has specific regulations for determining which individuals need a 1099-NEC Form. Let’s take a closer look at these determining factors.
Payment of $600 or more in services
When making a payment to a vendor, it is vital to remember that a 1099-NEC Form is only required if the payment was $600 or more. If the payment is less than that, a 1099-NEC form should not be issued. The purpose of this form is to keep a record of payments made to non-employees, which is necessary for business tax filing purposes. You must send a copy of the form to the vendor and file a copy with the IRS. It is essential to keep track of these payments throughout the year so that you can accurately complete the 1099-NEC forms.
Payments to Attorneys
An attorney is a legal practitioner providing their services, this includes law firms. If you pay attorneys' fees of $600 or more in the course of your trade or business, you must report them in box 1 of Form 1099-NEC under
section 6041A(a)(1).
Generally, corporate payments do not need to be reported on Form 1099-NEC. However, this rule does not apply to attorneys and law firms. It is important to note that this rule applies regardless of whether the law firm is a sole proprietorship, partnership, LLC, or corporation. If the legal services rendered amount to a minimum of $600, it is compulsory to file Form 1099-NEC to avoid potential penalties.
Note: Section 6041A(a)(1) of the Internal Revenue Code (IRC) is a provision that outlines reporting requirements for payments made in the course of a trade or business. Specifically, this section mandates that any person engaged in a trade or business who makes payments in the course of that trade or business totaling $600 or more to any single payee in a calendar year must report those payments
to the IRS.
To report payments to an attorney on Form 1099-NEC, you need to obtain their Taxpayer Identification Number (TIN). You can obtain the TIN by using Form W-9. The attorney must provide their TIN promptly, regardless of whether they're a corporation or another entity. However, the attorney isn't required to certify their TIN. If the attorney fails to provide their TIN, they may face a penalty under section 6723 and its regulations, and you must back withhold on the reportable payments.
Note: Under section 6723, if any individual fails to comply with a specified information reporting requirement by the prescribed time, they will be liable to pay a penalty of $50 for each failure. However, the maximum amount imposed on such an individual for failures during any calendar year will not exceed $100,000.
Direct Sales Totaling $5,000 or more.
According to the IRS instructions, businesses can use box 2 on Form 1099-NEC to report sales of consumer products for resale amounting to $5,000 or more, conducted through a buy-sell, deposit-commission, or any other basis. If you want to report sales totaling $5,000 or more, you can file Form 1099-NEC with the IRS.
Reporting your direct sales totaling $ 5,000 or more is a straightforward process. You can use either box 2 on Form 1099-NEC or box 7 on
Form 1099-MISC.
Note: Please report these sales in one form only. The report you need to give to the recipient for these direct sales does not have to be made on the official form. Instead, you may provide a letter including this information, commissions, prizes, awards, and any other relevant details.
Trade or business reporting only.
When any payments are made in the course of your trade or business, reporting them on Form 1099-NEC is mandatory. However, personal payments are not reportable. Various organizations, including nonprofits involved in a trade or business, trusts of qualified pension or profit-sharing plans of employers, some tax-exempt organizations under section 501(c) or 501(d), farmers' cooperatives exempt from tax under section 521, and widely held fixed investment trusts are subject to these reporting requirements. Additionally, payments made by federal, state, or local government agencies are also reportable.
Reportable payments to corporations
It is commonly believed that businesses are not required to send out 1099-NEC forms to corporations, including limited liability companies (LLCs) that are treated as C or S corporations. However, there are some exceptions to this rule when reporting payments on Form 1099-NEC, which include:
- Attorney fees, which should be reported in box 1 of Form 1099-NEC,
-
Payments made by federal executive agencies to vendors for services are also reported in box 1 of
Form 1099-NEC.
Directors' fees
It is legally required to report directors' fees and other remuneration, including payments made after retirement, on box 1 of Form 1099-NEC in the year they were paid. It is important to note that this information must be reported accurately and timely to avoid any penalties or legal issues. Failure to report this information may result in penalties from the IRS. Therefore, it is crucial for businesses to ensure that they are in compliance with the legal requirements and to submit accurate and timely reports.
Commissions paid to lottery ticket sales agents.
If a company sells online and instant lottery tickets and pays commissions to licensed sales agents, it must file Form 1099-NEC to report the commissions paid. You must control and take responsibility for online and instant lottery games and pay commissions to agents who sell tickets. If the commissions paid to an agent for the year total $600 or more, it must be reported in box 1 of Form 1099-NEC.
Handling Payments on Behalf of Others.
If you make a payment on behalf of another person who is the source of the funds, you may need to file Form 1099-NEC for reportable payments under section 6041. For information reporting purposes, you are considered the payor if you perform management or oversight functions related to the payment or if you have a significant economic interest in the payment, such as a lien.
Example: A bank that provides financing to a real estate developer for a construction project may pay contractors from an account. In such cases, the bank is responsible for filing information returns for payments of $600 or more to contractors because it performs management and oversight functions over the payments.
2. What kinds of payments don’t require a Form 1099-NEC?
Certain payments may not necessitate filing Form 1099-NEC despite their taxability to the recipient. The payments that do not require Form 1099-NEC are as follows:
- Payments made to a corporation, including an LLC treated as a C or S corporation, are generally included.
- Payments made for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments of rent to real estate agents or property managers should be reported on Form 1099-MISC.
- Wages, bonuses, prizes, and awards paid to employees must be reported on Form W-2.
- Military differential wage payments made to employees while on active duty in the U.S. Armed Forces or other uniformed services should also be reported on Form W-2.
- Business travel allowances paid to employees may be reportable on Form W-2.
- Current life insurance protection costs should be reported on Form W-2 or Form 1099-R.
- Payments made to a tax-exempt organization, including tax-exempt trusts such as IRAs, HSAs, Archer MSAs, Coverdell ESAs, and ABLE (529A) accounts, the United States, a state, the District of Columbia, a U.S. territory, or a foreign government should be reported.
- Payments made to or for homeowners from the HFA Hardest Hit Fund or a similar state program should be reported on Form 1098-MA.
- Compensation for injuries or sickness by the Department of Justice as a PSO disability or survivor's benefit or under a state program that provides benefits for surviving dependents of a PSO who has died as the direct and proximate result of a personal injury sustained in the line of duty.
- Compensation for wrongful incarceration for any criminal offense for which there was a conviction under federal or state law. Section 139F explains more information on certain amounts received by wrongfully incarcerated individuals.
- If the service provider is subject to state or local sales taxes, and you pay those taxes directly to the provider, you must report the taxes as part of the total payment on Form 1099-NEC. However, if the service provider collects sales taxes from you, the buyer, you do not need to report those taxes on Form 1099-NEC.
- Payments made through credit cards, payment cards, or third-party network transactions are reported on Form 1099-K by the payment settlement entity under Section 6050W. At the same time, it should be noted that these payments are not subject to reporting on Form 1099-NEC.
- Payments made to informants as an award, fee, or reward for providing information about criminal activity do not need to be reported if they are made by government agencies or nonprofit organizations that are tax-exempt under Section 501(c)(3).
- Canceled debts reportable under section 6050P must be reported on Form 1099-C are not reportable on Form 1099-NEC.
- Form 1099-NEC is not used for reporting scholarships or fellowship grants. If these grants are taxable to the recipient because they're paid for teaching, research, or other services as part of getting the grant, they're considered wages and should be reported on Form W-2.
- To report difficulty-of-care payments that don't count as taxable income for the recipient are not required to be reported on Form 1099-NEC. If these payments encourage care providers for fewer than 11 children under 19 or fewer than six individuals aged 19 or older, they don't need reporting. Check section 131(c) for details. Only payments for more than 10 children or five other individuals must be reported on Form 1099-NEC.
- Form 1099-NEC is not meant to be used for reporting employee business expense reimbursements. If you pay your employees under a nonaccountable plan, you should report them as wages on Form W-2. Generally, if you make payments under an accountable plan, you don't need to report them on Form W-2, except in certain cases, such as when you pay a per diem or mileage allowance.
Note: Section 139F in the US Internal Revenue Code addresses the tax treatment of compensation for individuals wrongfully incarcerated, aiming to exempt specific amounts from federal income tax.
Note: Section 501(c)(3) is a provision in the Internal Revenue Code (IRC) of the United States that pertains to nonprofit organizations. Specifically, it outlines the strict criteria for organizations to qualify as tax-exempt charitable organizations. To be recognized as a tax-exempt organization under Section 501(c)(3), an entity must be organized and operated exclusively for charitable, religious, educational, scientific, literary, or other specified purposes as defined by the IRS.
Learn more about the 1099-NEC Instructions in detail here https://www.taxbandits.com/1099-forms/form-1099-nec-instructions/
3. Meet Your 1099-NEC E-filing Requirements with TaxBandits!
TaxBandits, as an IRS-authorized e-file service provider, offers valuable solutions for tax professionals and businesses of various sizes. Follow these simple steps to e-file Form 1099-NEC:
- Step 1 : Create an account with TaxBandits and select Form 1099-NEC.
- Step 2 : Enter the required 1099-NEC information.
- Step 3 : Review the details and transmit the 1099-NEC to the IRS & State.
Businesses can easily fulfill the IRS requirement for distributing recipient copies of Form 1099-NEC with TaxBandits! Opt-in to Postal Mailing and/or Online Access services and TaxBandits will print and mail 1099-NEC copies and/or distribute electronic copies on your behalf.
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