Typically, businesses must report payments and compensations made to nonemployees and certain vendors using 1099 forms. If you receive income from a source other than earned wages or salaries, you may receive a Form 1099-MISC or Form 1099-NEC. Generally, the income on these forms is subject to federal and state income tax for the recipient. We'll walk you through what's included on these forms and what penalties you may incur for not meeting a 1099-NEC or 1099-MISC filing deadline.
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When does a business need to issue a 1099-MISC?
Form 1099-MISC, for Miscellaneous Income, is a tax form that businesses complete to report various payments made throughout the year. One Form 1099-MISC should be filed for each person or non-incorporated entity to whom the business has paid at least $10 in royalties or at least $600 for items such as rent and medical or health care payments.
For tax years through 2019, nonemployee compensation was also reported on Form 1099-MISC; however, beginning in tax year 2020, that compensation needs to be reported on Form 1099-NEC instead.
When does a business need to issue a 1099-NEC?
Beginning in tax year 2020, businesses will complete a 1099-NEC, or Nonemployee Compensation, to report nonemployee payments of $600 or more. The 1099-NEC form has replaced what used to be recorded on Form 1099-MISC, Box 7.
You will complete and send a 1099-NEC form to any independent contractors or businesses to whom you paid over $600 in fees, commissions, prizes, awards, or other forms of compensation for services performed for your business.
However, there are some exceptions to who should receive one of these forms. The following individuals and/or businesses should not receive a 1099-NEC:
- If you paid for physical products or goods — not services — then this form should not be issued.
- If the business you paid is a C corporation or S Corporation, then a 1099-NEC need not be issued unless you paid the business for medical or health care payments or attorney services. Additionally, the IRS outlines some other specific circumstances where a 1099-NEC should or should not be issued to a corporation.
Another important note is that you should send a 1099-NEC to any business that is an LLC sole proprietorship. If you’re not sure if the business is a C corporation, S corporation, or an LLC, you can check the W-9 you received from the vendor when you hired the workers.
What other changes have been made to Form 1099-MISC?
Several changes have been made to update Form 1099-MISC beginning in the tax year 2020. The most notable is that box 7 is no longer used to report nonemployee compensation. Instead, this box now contains a checkbox to indicate $5,000 or more paid for direct sales. The other changes are mainly updates to which boxes contain which reporting information, so take your time when completing this form if you're familiar with the previous formatting.
What are the filing deadlines for 1099-MISC and 1099-NEC?
Beginning with the 2020 tax year, the Form 1099-MISC deadline is March 1 if you file on paper and March 31 if you file electronically.
Beginning with the tax year 2020, Form 1099-NEC must be filed by January 31 of the following year whether you file on paper or electronically. If the deadline falls on a weekend or holiday then it is moved to the next business day. This means the business owner must send all copies of Form-NEC Copy A to the IRS by that date and send Copy B and Copy 2 to any nonemployees for whom a form was completed.
Additionally, there's no automatic 30-day extension to file Form 1099-NEC, and the IRS won't automatically be sharing the information with states. Businesses will need to send Copy 1 of the form to state departments themselves.
What are the penalties for a business failing to meet a 1099-MISC or 1099-NEC deadline?
If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $50 to $270 per form, depending on how long past the deadline the business issues the form. There is a $556,500 maximum in fines per year. If a business intentionally disregards the requirement to provide a correct payee statement, it's subject to a minimum penalty of $550 per form or 10% of the income reported on the form, with no maximum.
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What are the penalties for not reporting Form 1099 income?
If you receive a Form 1099-MISC or Form 1099-NEC that reports your miscellaneous income, that information also goes to the IRS. If you don’t include this and any other taxable income on your tax return, you may also be subject to a penalty. Failing to report income may cause your return to understate your tax liability. If this happens, the IRS may impose an accuracy-related penalty that's equal to 20% of your underpayment. As an example, if the failure to include your miscellaneous income caused you to understate your tax liability by $5,000, your penalty would be $1,000 ($5,000 x .20 = $1,000).
How do I report Form 1099-MISC or Form 1099-NEC on my tax return?
To avoid an underpayment penalty, be sure to include your miscellaneous income on your Form 1040. If your income is nonemployee compensation, you'll likely need to complete Schedule C, Profit or Loss From Business, and then transfer the net earnings to Form 1040. For rents or royalties, you will typically complete Schedule E, Supplemental Income or Loss, and then transfer the applicable amount to Form 1040.
What happens if I need to pay back taxes for 1099s I didn't receive?
Sometimes, 1099s are issued and the IRS receives them but the taxpayer doesn't and the income did not get reported on their tax returns. If that happens to you, then you'll likely receive a notice in the mail from the IRS saying that you owe back taxes on the income that wasn't reported. The notice you receive will likely include interest on taxes due from the due date of the return to 30 days from the date on the notice. Penalties, if any, may or may not be included in the notice. Interest will continue to accrue until the amount owed is paid in full. It is important to include all of your income on your tax returns regardless of whether or not you receive a 1099 form.
What should I keep in mind when filling out 1099s?
To make the process as quick and painless as possible, follow these tips:
- Keep your bookkeeping in order throughout the year so you have accurate records in January when the form needs to be filed.
- Request an updated W-9 form every year from your contractors. Make it a part of their onboarding process when they join the team.
- Make sure you have accurate information ready to go when filling out 1099s.
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