In the past, businesses have utilized the Form 1099-MISC to report payments to non-employees, but important changes are on the way, with a new form as well as rule and deadline changes to account for. Businesses utilizing independent contractors should take note.
So when should a business make use of the new Form 1099-NEC? Whenever it makes payments of at least $600 for services performed by an individual who is not an employee. Contractors, other vendors, as well as parts and material incidental to the service provided, also fall within the realm of Form 1099-NEC.
It also includes directors’ fees, payments for professional services, commissions to nonemployee sales agents, and taxable fringe benefits for nonemployees. Companies should also file a Form 1099-NEC for individuals from whom they withheld federal income tax under backup withholding rules, regardless of amount.
Businesses should continue to report other payments—such as rents, royalties, contest winnings and prizes, and payments for healthcare services—on Form 1099-MISC. In the case of payments to an attorney, the company should use Form 1099-NEC to report payments for actual legal services the attorney performs for the business but report other payments (such as payments made in a settlement agreement) on Form 1099-MISC.
Neither of these forms is used to report payments for merchandise, goods, materials, storage, or freight, or for the purchase of non-business personal services. Most payments made to corporations, including LLCs and S corporations, do not need to be reported on a Form 1099, but this exception does not apply to payments to attorneys, healthcare providers, and certain other specialized services.
The revisions to the 1099 information forms also caused some changes to filing deadlines. The due date for submitting Form 1099-NEC is February 1 for both the recipient and the IRS. The new 1099-MISC is also due to recipients by February 1, but the due date to the IRS is pushed back to March 1 for paper filers and March 31 if filing electronically.
There are numerous other exceptions and specific provisions for certain types of businesses and payments, so it is important to check with a tax professional before filing. In addition, companies should ensure they have updated accounting software that accommodates the revisions and have the right paper forms on hand. It is good practice to provide new vendors and service providers with Form W-9 (to obtain their taxpayer ID) before making any payments. This avoids the need to obtain taxpayer IDs when preparing 1099 forms.
The Critical Question—Employee or Nonemployee?
Properly filing the information reporting forms is actually the last step of the larger worker classification process—a process that can be complicated. The rules are complex and the penalties for improperly classifying workers can be substantial. In addition, worker classification also affects labor law compliance, and state labor codes may use different classification criteria than the IRS uses.
For many years, the IRS used a list of questions known as the “20 Factor” test to determine worker classification. Several years ago, it consolidated these factors into three categories:
Behavioral control – Does the company have the right to control both what the worker does and how the worker does the job? If so, the worker is probably an employee.
Financial control – Does the company control the business aspects of the relationship? Deciding factors include how and whether expenses are reimbursed, who provides tools, supplies, and training, and whether the worker also offers services to other businesses.
Type of relationship – The contract details between a worker and business will further define whether the worker is an employee or nonemployee. Benefits such as insurance, paid vacations, and sick pay, are indicative of an employer-employee relationship.
Dembo Jones’ team can help your business navigate the new rules for non-employee reporting as well as ensure your workers are classified correctly, so you can avoid potential penalties. Contact us today!