What You Need to Know About Form 1099
Changes to Non-Employee Compensation for 2021
More businesses are relying on the help of independent contractors to complete projects, and while that’s not the only reason to file a Form 1099, it is one of the most common. Regardless of whether you had payments to contractors in 2021 or made other payments besides non-employment income, you may have to prepare and file a Form 1099.
Now is a good time to examine your books to stay on top of who else may require 1099 forms to be sent. There are multiple 1099 forms, but the ones that get the most attention and questions, are Forms 1099-MISC and 1099-NEC. See the Q&A below for more information regarding these forms and what recent changes could mean for you.
Form 1099 Q&A
Questions regarding Form 1099 are common. Becoming more familiar with 1099 reporting prior to year-end can make the process of organizing and submitting payment records during tax filing season easier and less time-consuming.
Q: What’s the difference between Form 1099-MISC and Form 1099-NEC?
These forms differ in one specific way: a Form 1099-NEC will be used if you are reporting nonemployee compensation. If you have other income you need to report (rent, royalties, prizes, awards paid to third parties, etc.), you will use Form 1099-MISC. You may also receive a form 1099-MISC to report payments that aren’t subject to self-employment taxes.
Q: What is the threshold amounts for filing Form 1099?
A: Most business owners are familiar with the standard $600 threshold requirement to file Form 1099-MISC or 1099-NEC. Something new this year for our clients who plan on deducting fees paid to Adams Brown will have to fill out and send a Form 1099-NEC.
What many may not be aware of is that there are other amounts and types of payments that must be recorded, too. A low $10 threshold applies for royalties paid (box 2) and at least $10 of broker payments in lieu of dividends or interest (box 8). Additionally, a threshold of at least $5,000 applies to direct sales payments (box 7).
Q: When do I need to process 1099 forms?
A: Form 1099-NEC is due on January 31, 2022 to both the IRS and recipients. Form 1099-MISC is due to recipients by January 31, 2022 and filed electronically with the IRS by March 1, 2022.
Q: Are there any exemptions?
A: Yes. Personal payments (any payment you won’t deduct for tax purposes) do not need to be reported on Form 1099-MISC or 1099-NEC. Payments to a corporation are also exempt.
Q: What if I didn’t keep good records of vendor payments throughout the year?
A: Although it is best to keep a thorough record of all payments to vendors throughout the year, even ones that fall below the $600 threshold, make sure to take some time before year-end to review and collect payment data. The IRS has started cracking down on information in returns like the Form 1099.
It’s important to stay up to date because late filing penalties can get steep. A late form filed within 30 days of the due date will be subject to a fee of $50 per form. Late forms processed between 31 days late through August 1st will be subject to $110 per form. Anything not filed after August 1st will incur fees of $280 per form. Clearly, it’s better to take the time now to organize payment records and vendor accounts.
Q: What if I need to make a correction to a prior year 1099-MISC for a vendor payment?
A: According to the IRS, amendments to previous years – where non-employee compensation was still reported in box 7 of 1099-MISC – will still be made using the old Form 1099-MISC.
A good practice is to maintain an updated W-9 form for each vendor. Another tip is to update your accounting software so it can start flagging NEC vendors starting in January 2021. You can do this by inserting a “Display Name” flag like ‘Contractor’s Name – NEC’ or ‘Rent Proceeds – MISC’ so that it’s easier to segment vendor types. Automated payroll and outsourced bookkeeping are solutions to maintaining an organized 1099 reporting function without the hassle of spending time on it yourself.
Make sure to work with your tax professional prior to year-end so you can streamline the 1099 process for your business and save time in the long run. As always, your Adams Brown advisor is here to help.