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Who is supposed to get a 1099?

In many cases, the tax law requires businesses to report to the IRS payments they have made to sole proprietors & members of partnerships : subcontractors, consultants, professionals, gig workers and other service providers.

 

Form 1099-NEC, Non-employee Compensation

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Note: This form replaces Form 1099-MISC for reporting certain payments beginning in calendar year 2020. Prior to 2020 the following information is applicable to Box 7 on Form 1099-MISC.

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Payments of $600 or more for services performed by persons not treated as employees, such as fees to subcontractors, attorneys or accountants. Some examples include:

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  • Professional service fees, such as fees to attorneys, accountants, architects, contractors and engineers.

  • Fees paid by one professional to another, such as fee-splitting or referral fees.

  • 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.

  • Commissions paid to non-employee salespersons that are subject to repayment but not repaid during the calendar year.

  • Fees paid to non-employees, including travel reimbursements for which the persons did not account to the payer, if the fee and reimbursement total at least $600.

  • Payments to non-employee entertainers for services.

  • Exchanges of services (bartering) between individuals in the course of their trades or businesses. 

 

Generally, payments reported on Form 1099-NEC are subject to self-employment tax by the recipient. (And likely New Mexico gross receipts tax.) If the payments are not subject to self-employment tax, the third-party payer should report them on Form 1099-MISC as Other Income in Box 3.

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Exceptions

 

Payments on Forms 1099-NEC and 1099-MISC do not have to be reported if the business pays:

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  • By credit card or payment card and certain other types of payments, including third-party network transactions such as PayPal, Google Pay and Apple Pay.

  • A corporation, for merchandise, telephone, freight, storage and similar items

  • Rent to a real estate agent

  • A tax-exempt organization

  • The United States, any individual state, the District of Columbia, a U.S. possession or a foreign government.

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Information needed to prepare 1099s
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You must have each worker's name, mailing address and federal Taxpayer ID Number. (SSN or EIN). This information is easily obtained by having workers fill in Form W-9, Request for Taxpayer Identification Number and Certification. If a worker does not provide information before you are required to file the 1099, the worker's compensation will be subject to backup withholding.

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Best practice. Avoid the frustration and possible penalties if you don't get the required information. Have workers fill out a W-9 at the time they are hired. This is similar to need for employees to fill out a W-4 at the  beginning of their employment.

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When to file

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Third-party payers must provide a copy of the applicable form to the payee on or before Jan. 31 following the end of the tax year. The payer must also file Forms 1099-NEC by January 31 and Forms 1099-MISC with the IRS by Feb. 28 (March 31, if filing electronically).

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Also read

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