It’s important to keep up to date with new tax rules when they are brought in by the IRS. One of these is the 1099-MISC form. Traditionally this has been used to report contractor income. But now businesses will have to use the 1099-NEC form (it is short for “non-employee compensation”).
This is actually something that was used about 30 years ago. But now the IRS wants to revive the form and the main reason is that the agency wants to make it easier to deal with the deadlines. The 1099-MISC form also includes income for rents, prizes/awards, and medical payments.
Small or Regular Payments Are Common
There is a side issue for companies to consider when reporting payment amounts on Form 1099. Small or regular payments for service providers are common, but if a company is paying a large amount to a single contractor in the tax year, the IRS may begin to scrutinize the working relationship, to make sure the worker is not actually an employee. If you are not 100% sure on this matter, now is the time to speak to your accountant.
If you are familiar with the requirements for the 1099-MISC form, then the new one will not be much different.
The main requirements that you would need to fill out a 1099-NEC form include:
- The payment–which was made to a contractor–must be at least $600 for the tax year. The amount is reported on Box 1 of the 1099-NEC form.
- The payment was made for services for your business. Thus, it cannot be for personal activities, such as having someone repair your home. But the payments can be made to government agencies and nonprofits.
- The payment must be for an individual, partnership, estate, or corporation. Although, there is an exception–that is if the entity is a C corporation or S corporation.
There are some other times when you need to file a 1099-NEC form, which is not as common. They include the following:
- A payment of at least $10 for royalties.
- Withholding of any federal income taxes for backup withholding for employees.
Requirements Can be Ambiguous
One of the toughest parts about determining whether to file a 1099-NEC form is whether the payee is a contractor or not. The requirements can be ambiguous.
The IRS does provide some guidance on this definition. The general definition for a contractor is a person that has the “right to control or direct only the result of the work and not what will be done and how it will be done.” The IRS does give some examples, such as the following:
- Commissions to salespeople that have repayment terms but have not been repaid during the tax year.
- Fees for professional services like legal and financial advice.
- Fees among professionals say for referrals.
Form 1099 for contractor payments is one way for the IRS to match the tax records of contractors with the payments reported by their clients. While the burden of filing the form falls on the company hiring the contractor, by filing accurate 1099s the company will fulfill its statutory tax obligation.
