It is the beginning of the year, right? Have you committed to a New Year’s resolution? Maybe you’re going to eat healthier, work out more, procrastinate less, or adjust your work-life balance.
We cannot help you with every one of those things, but you can read our latest blog post on rethinking work-life balance for some ideas on that last one! And we all can likely get better at overcoming procrastination.
Procrastination is one of those things in life to which we always seem vulnerable. I get it! In business, however, we cannot afford to push off goals or deadlines. This is the time of year when businesses need to finalize their books for year-end tax purposes.
Let’s get to it. There are two forms, specifically the 1099-MISC and 1099-NEC, that are sometimes neglected. These forms need to be sent and filed by the last day in January. Taxable income on these forms is to be reported to recipients, as well as to the Internal Revenue Service (IRS).
What’s the difference between these two tax forms? And how do we figure out who gets which form and what amounts need to be reported?
Read on to better understand the difference between the 1099-NEC and 1099-MISC tax forms. We’ll also help you determine what information needs to be reported on which 1099 form and to whom it needs to be sent.
Forms 1099-NEC and 1099-MISC
If payment of $600 or more is made to a non-employee for services provided, those entities will need to be sent a 1099 form. The type of payment determines whether to send Form 1099-NEC or Form 1099-MISC.
Form 1099-NEC (Non-Employee Compensation) is prepared when a business pays for services performed by someone who isn’t an employee.
Form 1099-MISC is prepared when payments are made for miscellaneous items like rent, prizes or awards. Hence the name, 1099-MISC.
These payments made are required to be reported to both the business or individual paid and to the IRS.
A Form 1096 (the annual summary and transmittal form) accompanies the 1099s to the IRS. You will need a separate Form 1096 for each type of 1099 you are filing. Both the recipient and IRS copy need to be e-filed or postmarked by January 31st.
Acquiring Information for 1099s
The W-9 contains the information you’ll need to determine whether to issue a Form 1099-MISC or 1099-NEC to the vendor. As a best practice, you should obtain a Form W-9 before paying an independent contractor or business. It is much easier to gain this information when you still have something they want–their payment!
Another thing to consider getting is a form for proof of liability insurance. One of the differences between an employee and a sub-contractor is the liability if something happens while work is being performed.
In the event a 1099 needs to be generated, you will have these forms before any business relationship is fully established.
The Form W-9 shows the name of the business or individual, federal tax classification or filing status, address, and taxpayer identification number (TIN). The form needs to be filled out based on the information used on their tax return.
An individual may use their social security number instead of an employer identification number (EIN). In fact, if the vendor is a single-member (one owner) LLC, the IRS instructions indicate that line 1 of the Form W-9 should be the individual’s full name as it appears on the tax return. Then line 2 would be the business name. Rather than using the business tax ID number, the IRS prefers that you use the individual’s social security number since that’s what matches to the tax return filed annually. If the single-member LLC vendor doesn’t fill out the W-9 in this manner, it can cause you to receive a “mismatched TIN” letter from the IRS.
Be aware of which box is checked for federal tax classification. If the legal status of the recipient is a C or S Corporation, then a Form 1099 does NOT need to be sent (except for the amounts paid to attorneys as we will discuss later). It is always a good idea to keep the Form W-9 for documentation regardless of whether any 1099s are sent.
The most common amounts found on the Form 1099-MISC are amounts paid for rent. These are reported in Box 1.
If you rent your business space from another entity, either owned by another entity of yours or someone else, you will need to issue a Form 1099-MISC for rents totaling $600 or more in one calendar year.
If you are a franchisee, you likely pay royalties to the franchisor. These amounts would go in Box 2.
Box 10 is utilized if you had a legal settlement or real estate closing and paid that amount to an attorney. The reason for this special box is that it doesn’t necessarily count as income for the attorney receiving the 1099-MISC since they likely aren’t keeping all of the funds paid.
Payment for services performed by someone who is not your employee or a business that is not incorporated would be reported in Box 1 on the Form 1099-NEC. Common types of services that often need a Form 1099-NEC: advertising/marketing, IT/computer services, janitorial/cleaning, professional fees, accountants, consultants, and repairs/maintenance.
Attorney fees paid for services rendered should be reported on the Form 1099-NEC, not the Form 1099-MISC. Examples of these services include: reviewing contracts, drafting agreements, and legal counsel regarding employment or business law. Regardless of whether the attorney is a corporation or not, you still need to report all cumulative payments of $600 or greater on either a Form 1099-NEC or 1099-MISC.
If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $50 to $270 per form not filed.
We hope that you reach all of your personal and business goals you’ve set for 2022! While we may not be able to assist you with all of your goals, if you have any questions about completing year-end tax forms, that’s what we’re here for!