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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

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.

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:

  • 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.

Exceptions

 

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

  • 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.

Information needed to prepare 1099s

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.

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.

When to file

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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