A new year brings an opportunity for a fresh start to your business accounting practices. Something that is often over-looked by small businesses is the preparation of Forms 1099. While there are several different Forms 1099, this article will focus on the most common – Form 1099-NEC (non-employee compensation, formerly reported in box 7 on Form 1099-MISC). Any payments for rent will still be reported in box 1 on Form 1099-MISC. According to the Internal Revenue Service, a 1099-NEC should be issued for each person who is not taxed as a corporation and who is not your employee, to whom you have paid at least $600 for services performed; attorneys to whom you have paid at least $600 regardless of tax classification; and, if you are in the trade or business of purchasing fish for resale, any cash payments of $600 or more for fish or other aquatic life.
Although 1099s aren’t prepared and mailed until January, the preparation actually begins when the worker is contracted to do a particular job. It’s at this time that a W-9 needs to be filled out, giving the payor the worker’s tax ID, tax classification, and address-all of which is needed to properly submit 1099s in January of the following year. Waiting to obtain this information can prove to be tricky, especially if an affiliation with the worker is not maintained throughout the year. Another obstacle that can hinder the process, is the refusal of the worker to give the payee the information needed. In this instance, a 1099-NEC can still be completed, replacing the lacking tax ID number with “refused”. You will want to make note of each time you requested the completed W-9 to reduce your chance at penalties assessed by the Internal Revenue Service. Also, any future payments to the worker should be reduced by 28% for backup withholding.
Speaking of penalties, the consequences for not filing Forms 1099 timely are high. Forms 1099-NEC are due on January 31. If the forms are mistakenly filed late or not filed at all, the penalty can range from $50 to almost $300 per Form 1099. If the forms are intentionally disregarded, the penalties can be as much as almost $600 per Form 1099.
In short, follow these steps to ensure that you are compliant with the Internal Revenue Service’s requirement to file Forms 1099-NEC:
- Request a completed Form W-9 from any attorney or non-employee that performs a service for your business or trade (think repairs, shredding, contract labor, etc.)
- Maintain good records of payments for the service and ensure that they are allocated properly in your general ledger
- Complete and file Forms 1099-NEC as well as the Form 1096 transmittal for anyone mentioned above that you paid at least $600 by January 31 of the following year