A Business Guide to Sending Out 1099s
In the last year there have been a number of changes and updates regarding the 1099-Misc Form, these changes will impact businesses who work with independent contractors and freelancers. The Internal Revenue Service (IRS) is re-introducing form 1099-NEC, Non-employee compensation, we have not seen this form since 1982 when the movie E.T. was released. The change does not remove the old form 1099-MISC, instead the form will be filed starting in January 2021 to report payments that have previously been reported on Box 7 of form 1099-MISC.
In this guide we will cover the specific instructions on which form to use, filing deadlines, and your responsibility as a business.
Specific Instructions for form 1099-MISC
The IRS has specific guideline as to whom must file form 1099-MISC, Miscellaneous Income. You must file the form for each person in the course of your business to whom you have paid the following during the year:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
Rents
Prizes and awards
Other income payments
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
Any fishing boat proceeds
Medical and health care payments
Crop insurance proceeds
Payments to an attorney
Section 409A deferrals; or
Non-qualified deferred compensation
You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.
Specific Instructions for form 1099-NEC
The IRS has specific guideline as to whom must file form 1099-NEC, Non-employee Compensation. You must file the form for each person in the course of your business to whom you have paid the following during the year:
- At least $600 in:
Services performed by someone who is not your employee (including parts and materials)
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish; or
Payments to an attorney
You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.
Filing Deadline for Both Forms
It is important to note that the deadline has changed for tax year 2020, Form 1099-MISC must be sent to the recipient by February 1, 2021 and sent to the IRS by March 31, 2021 (e-file) or March 1, 2021 (paper file). Form 1099-NEC must be sent to the recipient and IRS by February 1, 2021.
If you do not file on time, you will be fined per return and the penalty increases with each month that you do not file. Failure to file and/or provide both 1099 forms may result in fees that can be as high as $500 per payee and $250 per copy not submitted to the IRS.
Your Responsibility as a Payer
We can summarize that if you used independent contractors such as graphic designers, attorneys, consultants, or event planners, you are required by the IRS to send a 1099 if you paid them more than $600 in the tax year (with the exception of royalties). Here is what you are responsible for in order to remain compliant:
Determine who is a contractor
Obtain an IRS form W-9 from each individual payee to whom you paid money throughout the tax year
Complete 1099 Form
Mail form by deadline to contractor
Meet the filing deadline mentioned above for payee and IRS
Keep a record of your filing
Understanding guidelines and the technicalities of accounting is not fun for everybody, it is what we are passionate about. CPA by Choice is continuously monitoring updates from the IRS to ensure that our clients are up-to-date and compliant. Please call us/message us if you need our assistance and allow us to take care of your accounting, we want to help your business remain compliant with the changes in 1099s and anything the accounting world in 2021 may bring.
*For Guideline specification you may visit: https://www.irs.gov/instructions/i1099msc