IC's and the 1099

Definitions:

Independent Contractor (IC): a worker that is not considered an employee of a company.

Vendor: an individual or business that your business paid.

W9: a form independent contractors and businesses that provided a service to your company complete listing their legal name or business name, entity type, address, and Tax ID or social security number.

1099: a tax document that a business gives an independent contractor or a business that they paid for services, each January, that states all pertinent information regarding amounts paid.

Think of this as Non-Employee Compensation (NEC). You received help in your business from someone that was not an employee. Such as labor, legal, accounting, consulting, marketing, repair work, etc.

For simplicity’s sake, at times I refer to all NEC types as IC in the article.

NEW FOR TAX YEAR 2020:

A brand new 1099 form debuted in 2020. The 1099-NEC. This form was created specifically for Non-Employee Compensation and is used again in tax year 2021.

This will be the most common form for most small businesses. Box 1 on this form is labeled ‘Nonemployee Compensation’ this is where you will include the amounts we are discussing in this article.

This amount used to be in box 7 on the 1099-MISC. The 1099-MISC is still being used but not for nonemployee compensation. The form has been revamped. However, it is still being used for rent payments. We have many clients that will be sending both forms. They will send the 1099-NEC to contract type vendors and a 1099-MISC to their landlord.

The Details:

Federal law requires a 1099 form to be issued by January 31st to all Independent Contractors (IC’s) who received $600 or more during the prior year. If January 31st is on a weekend then the due date would be the next business day.

A common question revolves around the dollar amount. If the total amount you paid a vendor in the calendar year (with included payment methods (see exclusions below)) is less than $600 you will not send a 1099. If the amount is equal to $600 or higher you will need to send a 1099.

For additional clarification, if you paid anything less than $600.00 the vendor does not qualify for a 1099. While you might round on reporting you would never round amounts for 1099 purposes. If you paid the vendor $599 they would not qualify as they didn’t physically get an amount more than $599.99.

EXCEPTIONS:

It’s no surprise that there are some exceptions. I am listing the most common.

Any amounts you paid using a credit card are not included in the 1099. (Instead, the credit card merchant will send a 1099K to the vendor.) There are some other 3rd party payment systems that are included in this exemption such as PayPal.
Businesses that are taxed as either a C or S Corporation will not need a 1099. That’s one reason it’s so important to get a completed W9 so you know the entity’s structure. – According to the IRS 1099 publication, 2020 Instructions for 1099-MISC and 1099-NEC, this exemption includes LLC’s that are taxed as S or C Corporations.

Prep Work:

•Review your expense transactions for the year and identify what VENDORS meet the above requirement.

•Once the vendors have been determined confirm that you have received a W9. If not, send the vendor a blank W9 form (available online) and ask them to complete and return ASAP. Without this information, you won’t have what is needed to populate the fields on the 1099.

•A tip on the above – If the vendor received payment from you in prior years and you have a W9 on file from them dated prior to 2021, request they complete a new W9. They could have a change of address, business name, or entity type. It’s important the 1099 has current information.

•Determine your method of producing the 1099’s. If manual, be sure to order the forms. If electronic, determine how to use the software and learn the due date required by the specific software in order to make the January 31st deadline.

•Once it’s time in January to process the forms, do it as early as possible. This can allow the vendor to contact you with questions or updates prior to the January 31st deadline.

PRO TIP:

Don’t pay a new vendor until you have received a completed W9. This will help ensure you’re not scrambling at year-end.

Employees’ and the W2

Definitions

Employee: a worker employed by a business that has taxes withheld from his/her paycheck.

W2: a tax document that an employer gives an employee each January that states all pertinent information regarding wages paid and taxes withdrawn.

The Details:

A W2 should be issued to all individuals that were employed at any time during the year. Even if they only received one paycheck, they still are due a W2. Federal law requires W2’s to be postmarked or hand-delivered by January 31st. So, there isn’t much time after the year closes to handle this process.

Prep Work:

•Make sure all employee paperwork is in order. If you’re using a payroll company this is probably already done, but double-check.

•Confirm employee addresses. If someone has moved update their address in your system so it is correct on the W2.

•Determine your method of producing the W2’s. If manual, be sure to order the forms. If electronic, determine how to use the software and learn the due date required by the specific software in order to make the January 31st deadline.

•Once it’s time in January to process forms, do it as early as possible. When the forms are ready, distribute to employees and request they confirm the information. This includes their Social Security number. Typos are easy to make, and you don’t want any on the final copy submitted to the government. Make any necessary changes and then you are ready to officially submit the forms.

PRO TIP:

Hire a payroll processing company to handle all payroll tasks throughout the year. There are so many payroll and labor laws to know and follow and chances are you’re not an expert in this area.

If you are unsure if your workers should be classified as employees or IC’s, check out our E-Book. There are multiple chapters dedicated to this topic with lots of details and examples. Get it while it’s on sale!

Be sure to leave us a comment. You might also like the article, Are you ready for tax time?

~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters.

The article is for informational purposes only and should not be construed as business, accounting or legal advice. Details are subject to change without notice.

IC's and the 1099

Definitions:

Independent Contractor (IC): a worker that is not considered an employee of a company.

Vendor: an individual or business that your business paid.

W9: a form independent contractors and businesses that provided a service to your company complete listing their legal name or business name, entity type, address, and Tax ID or social security number.

1099: a tax document that a business gives an independent contractor or a business that they paid for services, each January, that states all pertinent information regarding amounts paid.

Think of this as Non-Employee Compensation (NEC). You received help in your business from someone that was not an employee. Such as labor, legal, accounting, consulting, marketing, repair work, etc.

For simplicity’s sake, at times I refer to all NEC types as IC in the article.

NEW FOR TAX YEAR 2020:

The Details:

Federal law requires a 1099 form to be issued by January 31st to all Independent Contractors (IC’s) who received $600 or more during the prior year. If January 31st is on a weekend then the due date would be the next business day.

A common question revolves around the dollar amount. If the total amount you paid a vendor in the calendar year (with included payment methods (see exclusions below)) is less than $600 you will not send a 1099. If the amount is equal to $600 or higher you will need to send a 1099.

EXCEPTIONS:

Prep Work:

•Review your expense transactions for the year and identify what VENDORS meet the above requirement.

•Once the vendors have been determined confirm that you have received a W9. If not, send the vendor a blank W9 form (available online) and ask them to complete and return ASAP. Without this information, you won’t have what is needed to populate the fields on the 1099.

•A tip on the above – If the vendor received payment from you in prior years and you have a W9 on file from them dated prior to 2021, request they complete a new W9. They could have a change of address, business name, or entity type. It’s important the 1099 has current information.

•Determine your method of producing the 1099’s. If manual, be sure to order the forms. If electronic, determine how to use the software and learn the due date required by the specific software in order to make the January 31st deadline.

•Once it’s time in January to process the forms, do it as early as possible. This can allow the vendor to contact you with questions or updates prior to the January 31st deadline.

PRO TIP:

Don’t pay a new vendor until you have received a completed W9. This will help ensure you’re not scrambling at year-end.

Employees’ and the W2

Definitions

Employee: a worker employed by a business that has taxes withheld from his/her paycheck.

W2: a tax document that an employer gives an employee each January that states all pertinent information regarding wages paid and taxes withdrawn.

The Details:

Prep Work:

•Make sure all employee paperwork is in order. If you’re using a payroll company this is probably already done, but double-check.

•Confirm employee addresses. If someone has moved update their address in your system so it is correct on the W2.

•Determine your method of producing the W2’s. If manual, be sure to order the forms. If electronic, determine how to use the software and learn the due date required by the specific software in order to make the January 31st deadline.

PRO TIP:

Hire a payroll processing company to handle all payroll tasks throughout the year. There are so many payroll and labor laws to know and follow and chances are you’re not an expert in this area.

If you are unsure if your workers should be classified as employees or IC’s, check out our E-Book. There are multiple chapters dedicated to this topic with lots of details and examples. Get it while it’s on sale!

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