My clients always wonder why I stress so much about getting the information I need to file their 1099s and it’s because the penalties for not filing them correctly are so high. The “NEC” in Form 1099-NEC stands for Nonemployee Compensation and is used to report income for individuals who are not employees but have provided services to your business. The most common scenario where you would use this form is when you've paid $600 or more to a freelancer or contract worker.
If you are a business owner and have paid $600 or more to a non-employee, such as a freelancer, contractor, or vendor, for services provided during the tax year, you are required to file Form 1099-NEC.This form is not used for payments to employees; those are reported on a W-2 form. This form is also not used to report payments made to corporations.
The easiest way to ensure you file a 1099-NEC for the correct individuals is to have anyone who you pay more than $600 to complete form W-9 and keep a copy of the form on file for your records. It may also be prudent to have contractors who you work with on a continuing basis to complete an updated form annually to ensure the 1099-NEC has the correct information. You will also want to keep good bookkeeping records to make sure you report the correct amount paid to the contractor to the IRS.
The deadline for filing Form 1099-NEC is January 31st of the year following the tax year in which the payments were made. Failure to file your company’s 1099s by January 31st, can result in penalties ranging from $50 to $280 per form, depending on how late the filing occurs. You may also need to file 1099s with state and local tax authorities. It is important to note that deducting contract labor on a business return and failing to file 1099s with the IRS can be a red flag. There are also certain industries, like construction, that the IRS expects to receive 1099s from and will call into question if they don’t report any 1099s
Both the recipient and the IRS must receive copies of the form by January 31. Submit Copy A of Form 1099-NEC, along with a Form 1096 (Annual Summary and Transmittal of U.S. Information Returns), to the IRS. This can be done electronically through the IRS's FIRE system or by mail or by enlisting the help of a tax professional. Copy B of Form 1099-NEC must be given to the recipient no later than January 31st. If you are an independent contractor, you should be on the lookout for 1099s. I have had many tax issues arise from taxpayers not knowing what a 1099 was and ignoring the form when they received it and then failing to claim the income on their tax returns. In general, anything you receive that says “Tax Document” should be retained for your tax records and given to your preparer.
While it may seem inconsequential, the filing of form 1099 is one area where the IRS does not play around. The IRS wants these amounts reported because it’s one of best ways to ensure non-employee laborers accurately report their income for the tax year. They are holding businesses accountable for making sure deductions taken from the business income is reported on another taxpayer's return, whether that be a business or an individual. But don’t worry, if you enlist the help of a tax preparer, they can help guide you in how and when to file these documents and help your business maintain its compliance.
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