Everything You Need to Know About 1099s

Now is a good time to start preparing for the 2022 IRS Form 1099 filing deadline. Businesses and self-employed individuals have until Jan. 31, 2023, to furnish applicable 1099 forms to payees. Businesses should review, verify, and update the information they have on file for all persons and vendors to whom they paid in 2022; including employees, independent contractors, and advisors.

The IRS requires businesses to report nonemployee compensation totaling $600 or more on Form 1099-NEC rather than including it on Form 1099-MISC (which is limited to payments of rent, royalties, and other specific payments). Failure to correctly and timely file these forms may result in penalties. So, if you work with independent contractors, pay outside attorneys and accountants, here’s everything you need to know.

1099-NEC

The 1099-NEC is used to report payments over $600 made to an individual or vendor who was not a W-2 employee for services performed (including parts and materials), or for each person from whom you withheld federal income tax (under the backup withholding rules) regardless of the amount of payment. Applicable payments include those made to individuals, partnerships, and in some cases, corporations (and LLCs treated as corporations). Note that payments made with a credit card or payment card and certain other types of payments, including third-party network transactions like PayPal or Venmo, and are not subject to reporting on Form 1099-NEC.

Common examples of nonemployee compensation reportable in Box 1 of Form 1099-NEC include the following:

1. Payments to independent contractors, freelancers and gig-economy workers;
2. Professional services fees paid to accountants, lawyers, architects, engineers, etc.;
3. Fees paid by one professional to another, such as fee-splitting or referral fees;
4. Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service;
5. Commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year;
6. Prizes and awards for services performed by a nonemployee;
7. Exchanges of services between individuals engaging in the normal course of their respective trades or businesses; and
8. Taxable fringe benefits for nonemployees.
9. Directors’ fees

1099-MISC

The 1099-MISC is used if your business paid an individual or LLC at least $600 during the year for the following:

1. Rents (Box 1)
2. Royalties (Box 2)
3. Other income (Box 3), including prizes and awards
4. Federal income tax withheld (Box 4), including backup withholding
5. Fishing boat proceeds (Box 5)
6. Medical and health care services (Box 6)
7. Substitute payments in lieu of dividends or interest (Box 8)
8. Crop insurance proceeds (Box 9)
9. Legal Settlements (Box 10, payments to attorneys for services are reported on Form 1099-NEC)
10. Fish purchased for resale (Box 11)
11. Section 409A deferrals (Box 12)
12. Excess golden parachute payments (Box 13)
13. Nonqualified deferred compensation (Box 14)

Deadlines

Businesses must file Form 1099-NEC with the IRS and furnish copies to each payee by January 31, 2023. This deadline cannot be extended.

Form 1099-MISC must be furnished to payees by January 31, 2023, but businesses have until March 31, 2023, to file Form 1099-MISC with the IRS.

Next Steps

It is the responsibility of the payer to file Forms 1099-NEC and 1099-MISC, so it is important to have the information necessary to accurately fill out the forms. Review your accounting records and confirm the total amount paid to each contractor or vendor over the course of the tax year. You’ll want to confirm payees’ names, addresses and Social Security and/or Taxpayer ID numbers and request a copy of Form W-9, Request for Taxpayer Identification Number and Certification, from those individuals or vendors who records may be incomplete.

Contact Proseer to help you get started.