Written by: Anca Stradley, CPA, Dembo Jones
If your business paid $10 or more in gross royalties, or $600 or more in rents or compensation to a person who is not an employee or to an unincorporated business, the business is most likely required to report that amount to the IRS on a Form 1099. The payments must be made in the course of the trade or business during the calendar year (1099s do not need to be issued for payments made for personal purposes). The type of reportable transaction determines the specific Form 1099 that must be filed.
Two of the most common 1099 forms issued are the newer Form 1099-NEC, Nonemployee Compensation, to report payments for nonemployee compensation (NEC), and Form 1099-MISC, Miscellaneous Information.
Form 1099-NEC is required to be issued for payments for services rendered by non-employees in the course of your trade or business if these payments (of $600 or more during the calendar year) are paid to individuals, partnerships, single member limited liability companies, and limited liability companies taxed as partnerships. Non-employee compensation includes payments for services performed for your business, in the course of its trade or business, by individuals or entities that are not employed by your business. Reportable amounts could include payments for:
- Professional service fees paid to attorneys (in this case, reporting must also be made to C and S Corporations)
- Professional fees paid to accountants, architects, business consultants, etc.
- Payment for services, including the cost of incidental parts or materials used to perform those services
Form 1099-MISC, Miscellaneous Income is required to be issued if you made payments in the course of your trade or business of:
- 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 (e.g., litigation settlements), medical and health care payments (medical and health care payments must also be reported to C and S corporations), crop insurance proceeds, cash payments for fish (or other aquatic life), any fishing boat proceeds, or gross proceeds of $600 or more paid to an attorney in connection with legal services (but not for attorney’s services) during the year.
Payers may use either box 2 on Form 1099-NEC or box 7 on Form 1099-MISC to report any sales totaling $5,000 or more of consumer products for resale, on a buy-sell, a deposit-commission, or any other basis.
Common payments that are NOT required to be reported on either Form 1099-MISC or Form 1099-NEC include:
- Payments to C and S Corporations including LLCs that are taxed as C or S Corporations (except for medical/health care payments, legal fees and proceeds paid to an attorney).
- Payments to tax-exempt organizations including tax-exempt trusts, U.S. government, a U.S. state or U.S. possession.
- Payments to foreign individuals, entities, and foreign governments (see Form 1042-S reporting requirements).
- Payments for freight, inventory, merchandise, storage, or utilities.
- Any payments you made by credit card, debit card, gift card, or third-party payment network such as PayPal (These payments are being reported by the card issuers and third-party payment networks on Form 1099-K and are not subject to reporting on Form 1099-MISC or Form 1099-NEC).
- Wages, expense reimbursements or allowances paid to employees (report on form W-2).
- Scholarships or fellowships made to U.S. tax residents are not reportable on Form 1099, but they may still be taxable to recipients.
Form 1099-NEC is due to be filed with the IRS (on paper or electronically) and sent to recipients on or before January 31, 2023. Form 1099-MISC is due to be filed with the IRS by February 28, 2023 if you file on paper, or March 31, 2023, if you file electronically. The deadline to send Form 1099-MISC to recipients is generally January 31, 2023; however, if amounts are reported in boxes 8 or 10, the due date to send to recipients is February 15, 2023.
If you fail to file these forms by the required deadlines, you may be subject to penalties. The penalties can add up quickly and vary from $50 to $290 per form, depending on how long past the deadline the business issues the form or up to $580 per form for intentional disregard to file. There is a maximum penalty of $588,500 per year (or $206,000 for small businesses) if you file within 30 days; $1,766,000 per year ($588,500 for small businesses) if you file more than 30 days after the due date but by August 1st, and the maximum can go up to $3,532,500 ($1,177,500 for small businesses) per year if you file after August 1st or you do not file the required information returns.
Your business should have an ongoing procedure for requesting a Form W-9 from any vendor you work with during a calendar year and a plan to prepare and file your necessary Forms 1099 by the required deadlines. Also, don’t forget about other Forms 1099 that might apply to you as a business owner or investor, including Forms 1099-INT or 1099-DIV.
The tax and accounting teams at Dembo Jones can help you set up internal processes to accurately capture these expenses, and with the preparation of the required forms. Give us a call.