The deadline for filing 1099-NEC is January 31 of each year.
What is 1099-NEC and why do I care about it?
When a business hires an independent contractor and pays them $600 or more, it is required by law to file a 1099-NEC reporting non-employee compensation. This form is how the IRS knows that person has income.
In general, businesses have been lackadaisical about filing 1099-NEC’s, which creates an enforcement problem for the IRS. Without 1099-NEC, the IRS can’t easily tell if self-employed individuals are reporting their income accurately.
What’s the problem with filing 1099-NEC by January 31?
Due to poor planning or a poor understanding of the law, businesses often neglect to have independent contractors fill out form W-9, which is the form that provides the business all of the details they need to file a 1099-NEC, such as the taxpayer identification number.
After contractors are paid, the business might lose touch them, or they may be unresponsive or uncooperative about filling out a W-9.
Often, businesses don’t know they’re going to pay an independent contractor more than $600 and don’t realize until the end of the year when they’re reviewing their books for tax return purposes.
With one short month to get the 1099-NEC’s filed, meeting that deadline, businesses will need to be certain they are collecting W-9s in a timely fashion.
To issue a 1099-NEC or not to issue a 1099-NEC, that is the question.
You don’t need to file a 1099-NEC if you’re not a business.
Self-employed individuals, business entities, and landlords are all “businesses,” so contractors hired in the course of doing business need a 1099-NEC. However, no 1099-NEC is needed if you hire an independent contractor to perform a service to you as a private individual.
For example:
Sarah hires a contractor to make repairs on her personal residence and pays him more than $600. NO 1099-NEC.
Sarah hires a contractor to make repairs to the offices of Stonecreek Accounting, her business, and pays him more than $600. FILE 1099-NEC.
Sarah hires a contractor to make repairs in excess of $600 to a rental property that she owns. FILE 1099-NEC.
You do not need to file a 1099-NEC if you pay by credit card or PayPal or Venmo.
When you use a third-party processor to make a payment, such as a credit card or PayPal or Venmo, you do not need to collect a W-9 or issue a 1099-NEC to the contractor.
Third-party processors file a different form, called a 1099-K, to report payments to the recipient. Any payment that is eligible to be reported on a 1099-K is not eligible to be reported on a 1099-NEC.
If you did file a 1099-NEC in this situation, you run the risk of double reporting that person’s income, which may now appear on both a 1099-NECand a 1099-K.
If you pay by cash, check, wire transfer, ACH, or direct deposit, then you file a 1099-NEC.
If you pay by credit card, debit card, PayPal, or via some other processor, then you don’t file a 1099-NEC, because those payments are reported on a 1099-K by the third party processor.
You do not need to file a 1099-NEC if the independent contractor is something other than a self-employed individual or partnership.
The hitch here is LLC’s could be partnerships or self-employed individuals, but you don’t know if the LLC needs a 1099-NEC without asking. An LLC could be an S-Corp, or a C-Corp, which don’t need a 1099-NEC
Don’t assume. Ask for a W-9 from every individual contractor and every LLC. The independent contractor will check the appropriate boxes on the W-9 to help you ascertain whether or not you need to file a 1099-NEC.
Who counts as an independent contractor?
We won’t go into the finer points of differentiating independent contractors from employees, but an independent contractor is essentially any person that you pay for services who is not your employee.
Examples may include:
An accountant or attorney
Someone hired to work on a single, short-term project
A consultant
A worker with specialized skills needed temporarily
A repair person
Example:
A landscaper does not have an irrigation specialist on staff, so she hires an irrigation company that’s an LLC to install an irrigation system for a project she’s doing. She’s not sure if she’ll end up paying this irrigation company more than $600. She should ask the irrigation company to fill out a W-9, because she may need to issue a 1099-NEC.
Example:
A business normally pays its accountant $500 to complete its tax return, but this year asked the accountant to provide some additional consultation and paid her a total of $1,000 this year. The business should ask the accountant to fill out a W-9, because it may need to issue a 1099-NEC. With the January 31 deadline in mind, now is the time to look back on your year and start trying to collect any W-9’s that you’ve missed, and put a policy in place going forward to ensure you have all of the information you need to file your 1099’s at the end of the year.
