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How do you know who needs a 1099 and who doesn’t? Or whether they need a 1099-MISC or a 1099-NEC? And how do you fill them out to be sure you’ve given the taxman everything required? Here’s a handy guide to everything you need to know about Forms 1099-MISC/NEC.
If you’ve paid an independent contractor for goods or services during the year, you will most likely need to send them a 1099-NEC while also reporting their income to the IRS at the beginning of next year. There are other non-employee workers who are not contractors, and who will need a 1099-MISC. We’ll go into this a little later.
What is a 1099-NEC?
While there are a variety of 1099 forms, the newest one is 1099-NEC. It’s used to report payments to contractors and service providers who are not employees at your company and do not have taxes withheld. Before, these payments were reported using a 1099-MISC (and listed in box seven).
Because this form is provided to both the contractor and the IRS, it allows the government to track the amount of tax they should expect from non-employee contractors. This allows the IRS to determine whether the contractor, who is responsible for paying their own taxes, is paying the correct amount when their return is filed.
It’s important to remember that corporations, including S-Corporations and C-Corporations, generally do not receive a 1099 for services they provide. But to confuse the situation, if you pay attorney’s fees, you will have to issue a 1099-MISC, even if the attorney is incorporated. Other exceptions include payments to for-profit medical providers.
Form 1099 should only be issued to document payments for services rendered, but not for goods purchased. There is also a $600.00 threshold that needs to be surpassed, so you won’t have to issue a 1099 to a contractor that has been paid less than that amount during the year.
When is a 1099-MISC required instead of a 1099-NEC?
While there are exceptions to every rule, you will need to send a 1099-MISC if you’ve paid:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- At least $600 for:
- Services performed by someone who is not an employee
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Fishing proceeds
- Payments to an attorney
What’s the filing deadline for a 1099?
For tax year 2022, here are the due dates for each form.
You are required to furnish Form 1099-NEC to the payee and file with the IRS by January 30 in 2023.
For 2023, you are required to:
- Furnish Form 1099-MISC to the payee by January 31
- File with the IRS by February 28 (March 31, if filing electronically).
Next, let’s review how you complete each form.
Form 1099-NEC/MISC instructions
In order to accurately complete a 1099-NEC, or a 1099-MISC, you will need information usually found on the worker’s W-9. All non-employee workers should provide you with a completed Form W-9 when starting their work with your business. Here’s what you need:
- The 2022 forms: 2022 Form 1099-NEC – 2022 Form 1099-MISC
- The legal name of the contractor (NEC) or non-employee worker (MISC).
- Their business name (if it’s different from the contractor’s name).
- The federal tax classification of the contractor, so you will know whether you need to issue a 1099-NEC, or a 1099-MISC.
- Current and accurate mailing addresses.
- Tax Identification Number (EIN) or Social Security number.
- The total amount of funds paid to the contractor for the calendar year
To get you started on the right foot, included is an image of the form itself, and then you can see how it fits in with all the boxes below.
CHECKING ALL THE BOXES
Once you’ve entered the above information into the 1099, you can populate any of the 17 boxes that apply. Here’s a rundown with instructions for what each box is for:
Box 1 – Rents – This is used to report rent paid to a property owner. Rent paid to a real estate agent or property manager will not have to be reported. This box is also used for machine rentals or pasture land rental.
Box 2 – Royalties – This is used to report royalty payments of $10.00 or more for oil and gas royalties as well as royalties for intangible property such as patents, copyrights, and trademarks.
Box 3 – Other Income – Other income of more than $600.00 is reported in this box. This is for any income that is not reportable in any of the other boxes on Form 1099.
Box 4 – Federal Income Tax Withheld – If you are required to backup withholding on any nonemployees or contractors, you would enter the amount withheld in this box.
Box 5 – Fishing Boat Proceeds – Any proceeds from the sale of a catch on a fishing boat is entered in this box. Any additional cash payments made to fishing boat crews are entered in the box as well.
Box 6 – Medical and Health Care Payments – This includes payments made for various health care services such as injections or medications. Flexible spending accounts and employer-provided health care coverage are excluded. This mainly pertains to any payments made directly to a health care provider for services not covered by an insurance plan, but be sure to check with the IRS for specifics.
Box 7 – Payer Made Direct Sales of $5,000 or more – Enter an “X” in the checkbox for sales of $5,000 or more of consumer products by you to a person on a buy-sell, deposit–commission, or other commission basis for resale anywhere other than a retail establishment. No dollar figure should be entered in this box.
Box 8 – Substitute Payments in Lieu of Dividends or Interest – This is where you would enter aggregate payments of at least $10.00 of substitute payments received by a broker for a customer in lieu of dividends or tax-exempt interest as a result of a loan of a customer’s securities.
Box 9 – Crop Insurance Proceeds – This is used to report crop insurance proceeds paid to a farmer in the amount of at least $600.00.
Box 10 – Gross Proceeds Paid to an Attorney – Report proceeds more than $600.00 paid to an attorney in connection with legal services, such as a settlement.
Box 11 – Fish Purchased for Resale – If you are in the trade or business of purchasing fish for resale, you must report total cash payments of $600 or more paid during the year to any person who is engaged in the trade or business of catching fish.
Box 12 – Box 12 is used to report Section 409A Deferrals – This box is not required. If you do complete this box, enter the total amount deferred during the year of at least $600.00 for the nonemployee under all nonqualified plans.
Box 13 – If the FATCA filing requirement box is checked, the payer is reporting on this Form 1099 to satisfy its account reporting requirement under Chapter 4 of the Internal Revenue Code. You may also have a filing requirement. See the instructions for Form 8938.
Box 14 – Excess Golden Parachute Payments – Report wages, bonuses, severance pay, fringe benefits, pension benefits, transfer of property, the accelerated vesting or granting of stock options, and other deferred compensation that result from termination of a key employee after change of ownership or control of a business.
Box 15 – Nonqualified Deferred Compensation – Enter all amounts deferred (including earnings on amounts deferred) that are includible in income under section 409A if the nonqualified deferred compensation (NQDC) plan fails to satisfy the requirements of section 409A.
Boxes 16 – 18 – These boxes are used to show state or local income tax withheld from the payments.
Filling out the boxes on Form 1099-NEC is a little different (and much less information is added). Below is an image of the entire form, as well as a breakdown of what goes into each box.
Box 1 – Nonemployee compensation – In this box, you’ll enter the amount you paid an independent contractor — someone who is not your employee — for any labor or services that totaled $600 or more.
Box 2 – Did you have any sales totaling up to or exceeding $5,000 from products that were resold, deposit commission, or sold on another basis? All you’ll do is check off the box and won’t need to enter any other information in this spot.
Box 3 – Currently marked by the IRS as “for future use,” this field can be left empty.
Box 4 – Federal income tax withheld – Withholding federal income tax is uncommon for contractors, but if any wages are subject to backup withholding (which is a dollar amount that ensures Uncle Sam gets his taxes). Independent contractors could be subject to backup withholding if a tax identification number is listed incorrectly on the 1099 or on Form W-9.
Box 5 – Generally, it isn’t necessary to withhold state income tax from someone who is not your employee. If you did, you’ll report the number in this spot.
Box 6 – State/Payers state no. In this box, you will enter the state you withheld tax (list as an abbreviation and your state identification number).
Box 7 – State income – to finish up the form, in box 7, you’ll list the state payment dollar amount.
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Know your 1099-MISC and 1099-NEC
Whether it’s NEC or MISC, form 1099 can be one of the more confusing forms that you have to fill out, but luckily, if you keep your accounting records up to date throughout the year, most of the work is done for you.
While small companies may process their 1099’s without the use of a payroll software provider, for those that pay a several contractors or have a specialty business such as music publishers, it pays to automate the process as much as you can.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.