If you engage independent contractors and pay them in the aggregate $600 or more during the year, you must report payments to them and to the IRS. In fact, business tax returns ask whether you’re required to file 1099s and whether you have or will do so. You may report payments that are below this threshold, even though not required to do so. The failure to report nonemployee compensation—payments to independent contractors—meeting the threshold can result in costly penalties to you.
Here are 5 things to know about this reporting obligation.
1. Don’t confuse 1099-NEC with other 1099s
Before 2020, businesses using independent contractors had to report payments on Form 1099-MISC in box 7 for nonemployee compensation. Form 1099-NEC is now used for this purpose. The reporting threshold of payments totaling $600 or more to a contractor has not changed.
Use Form 1099-NEC to report payments to independent contractors, including any fringe benefits, as well as:
- Royalty payments for working interests in oil or gas properties.
- Attorneys’ fees of $600 or more paid in the course of your trade or business, even if the attorneys are incorporated.
- Directors’ fees
But payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity and are not subject to reporting on Form 1099-NEC.
2. The deadline for 1099-NEC is the same as for W-2s
Form 1099-NEC, Nonemployee Compensation to report to the IRS payments in 2021 of $600 or more to independent contractors is due by January 31, 2022. This deadline applies whether you file by paper or electronically. January 31, 2022, is the same date you must furnish the form to the contractor.
You may furnish the form by paper or electronically. If you want to do this electronically, you must obtain prior consent from the contractor for this delivery method.
3. An extension is possible, but not automatic
If you need more time to file and provide the form to your contractor, you may request a 30-day extension by submitting Form 8809, Application for Extension of Time to File Information Returns, by January 31, 2022. An extension is granted only if one of the following conditions are satisfied:
- You suffered a catastrophic event in a federally declared disaster area that made you unable to resume operations or made necessary records unavailable
- You experienced a fire, casualty, or natural disaster that affected your operations
- There was a death, serious illness, or unavoidable absence of the person responsible for this filing
- This was your first year in business
4. Backup withholding may apply
You may be required to withhold federal income tax from payments to a contractor at the rate of 24% if:
- The contractor has not provided you with a taxpayer identification number (TIN) (e.g., his/her Social Security number), or
- The IRS has notified you that the contractor’s TIN is incorrect
If you must withhold taxes, they must be deposited with the IRS and reported on Form 945, Annual Return of Withheld Federal Income Tax. This form is also due on January 31, 2022.
Note: If you’re a sole proprietor reporting your business income and expenses under your Social Security number, you must obtain an employer identification number (EIN) to deposit the withheld taxes.
To help avoid backup withholding, it’s advisable to have each contractor complete a new Form W-9 each year, which specifies their Social Security number or other TIN. Retain this with your records.
5. Penalties for filing failures vary with the delinquency
If the deadline, including extensions if applicable, for filing Form 1099-NEC has passed, you are going to be penalized. The amount of the penalty depends on how quickly you remedy the failure to file.
- If you file within 30 days of the due date, the penalty is $50 per delinquent return
- If you file after 30 days but on or before August 1, 2022, the penalty is $110 per delinquent return
- If you file after August 1, 2022, the penalty is $280 per delinquent return
There is an overall limit on penalties for businesses with average annual gross receipts in the 3 most recent years of no more than $5 million.
Whether you handle 1099-NECs in house (e.g., TurboTax business versions can generate and file the forms), rely on your CPA or other tax person, or use other outside firms (e.g., efile4biz), the burden is still on you to see that you handle things correctly. Just another burden on small business owners.