The end of the year is tax time, and one of the most important steps in your company’s tax preparation is filing the proper tax forms for your workers. One tax form that often creates confusion for business owners is Form 1099.
Unlike traditional employees, who are issued a W-2, 1099s are used to report payments you made to independent contractors (ICs) over the course of the year. Because the rules for filing 1099s can differ depending on how much ICs were paid, how they were paid, and what business entity they use, dealing with 1099s can be tricky.
Filing 1099s for 2020 is going to be even more confusing than usual, as the IRS split 1099s into two separate forms: Form 1099-NEC to report nonemployee compensation and Form 1099-MISC to report miscellaneous service payments.
To help ensure you get your 1099s filed correctly and on time, here’s what you should know about the two new forms.
Filing Form 1099-NEC
If you paid an IC at least $600 during the year, you must report it on Form 1099-NEC. This includes commissions, fees, and other types of compensation for the work that an independent contractor performed for your company. There are four conditions for filing a 1099-NEC.
If you meet all of the following four conditions, you should file a 1099-NEC for that contractor:
Both the IRS and the independent contractor must receive copies of Form 1099-NEC no later than Feb. 1, 2021.
Filing Form 1099-MISC
If you made payments for miscellaneous services that were not nonemployment compensation, you must report them on Form 1099-MISC. The following types of payments are reportable on Form 1099-MISC:
1. Payments of at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
2. Payments of at least $600 in:
The recipient of the Form 1099-MISC must receive it no later than Feb. 1, 2021, and the IRS must receive it by March 1, 2021, if you are submitting it on paper. If you are filing it electronically, the IRS must receive it by March 31, 2021.
Take the Stress Out of Tax Time
Although dealing with all of the tax forms required by the IRS can be a hassle, you can eliminate most of the stress—and risk—involved by implementing sound business systems. A Family Business Lawyer™ can support you in setting up an array of systems, not just for managing your finances and taxes, but for dealing with legal and insurance issues as well.
Additionally, when it comes to working with independent contractors, taxes aren’t your only concern. You’ll also need to pay close attention to ensure all your ICs are properly classified and have solid employment agreements in place. Meet with a Family Business Lawyer™ today for trusted guidance on hiring, classifying, and paying your ICs.