Tax season comes for every small business owner. The IRS will want their cut, and paying taxes isn't straightforward. Business owners must accumulate and fill out paperwork to justify deductions and clarify income.
Many business owners are familiar with W-2 Forms. They let employers document employees' salaries. However, many businesses will also need to file 1099-NEC Forms. NEC stands for non-employee compensation. These forms let business owners document payments to independent contractors for taxing purposes.
Who Is an Independent Contractor?
Independent contractors and employees both perform tasks for a company. Employers would struggle to keep up with obligations without their support. However, independent contractors and employees fall under different work categories. You don't want to jumble up numbers and put independent contractors on your W-2 Forms or vice-versa for employees.
The key difference between independent contractors and employees lies in the amount of control you have over them. Independent contractors act as independent entities. They can come in at their own schedules instead of a set 9-to-5 schedule every workday. The IRS gives us three common law rules to distinguish between independent contractors and employees:
- Behavioral: If a company has full control over what a worker does and how they perform the job, that worker is likely an employee. Independent contractors get more leeway as long as they produce satisfactory work.
- Financial: Does the employer provide the business aspects of a worker's job. If someone brings personal equipment to the job site and takes it home with them, that person may be an independent contractor.
- Type of Relationship: What are the working relationship and verbatim of the written contract? Employees receive various benefits such as health insurance and vacation pay. Independent contractors do not get these types of rewards.
The IRS can step in during disputes and classify workers as employees or independent contractors. You can reach out to the IRS for clarification. You must submit a 1099-NEC form for each independent contractor you paid over $600 in a fiscal year.
When to Use a 1099-NEC vs. 1099-MISC Form
Independent contractor payments initially required 1099-MISC Forms. Recently, the IRS decided small businesses must submit contractor payments through 1099-NEC forms. Every other miscellaneous expense falls under the 1099-MISC category.
Business owners should use 1099-MISC Forms for rent payments, business investments, paid royalties, and other miscellaneous expenses.
Not all payments to contractors require a 1099-NEC form. You don't need these forms for business travel allowances, payments to corporations, and payments for merchandise, freight, or storage. Any charges through credit cards, PayPal, and other 3rd party networks get reported on a 1099-K Form.
What Is a 1099-NEC Form?
A 1099-NEC form covers non-employee compensation. This form separates independent contractor payments from the broad 1099-MISC category. The IRS briefly used this form in 1982 and reintroduced it during the 2020 tax year.
Any worker not receiving a W-2 Form should receive a 1099-NEC form. Business owners need to document earnings for every worker and send that info to the IRS. Failing to account for workers or mislabeling them can result in an audit.
What Info Do You Need to Fill Out 1099-NEC and How to Find It?
You don't need to jump through many hoops to fill out a 1099-NEC. You will need the legal name and address of each independent contractor. If a business had paid $600 or more to five contractors, the business owner must fill out five 1099-NEC forms.
Business owners must document the total pay for each contractor. Keeping track of expenses on a spreadsheet throughout the year makes it easier to confirm total costs. You'll save plenty of headaches with advanced preparation. You will need a W-9 on file for each vendor which includes the vendor name, address, entity type, and tax ID number.
The IRS's website provides a hub to obtain 1099-NEC forms. You can get the form shipped to your address or print a copy. If you opt to print a copy, make sure you print Copy A. The IRS does not accept substitutes.
What is a W-9 Form?
A W-9 Form is an IRS document that is used to provide information about a vendor/payee. This form is used to request the vendor/payee's taxpayer identification number, which is used for reporting purposes on your 1099-NEC and 1099-MISC. If you pay this vendor through a payroll system like Rippling or Gusto, they will collect the W-9 on your company’s behalf. If you pay them directly, you can use this email template to request a W-9:
“Hello [insert vendor name] - in order to issue you a Form 1099 for tax year 2022, we need to collect a completed and signed Form W-9 from you. Here is a blank template (link: https://www.irs.gov/pub/irs-pdf/fw9.pdf) of Form W-9 you can use to complete, download, sign and email back to us. Thanks! “
How to Submit a 1099-NEC Form
Once you obtain a 1099-NEC Form, you need to submit it. The form comes with three copies. Copy A goes to the IRS along with Form 1096. All of the business 1099s get bundled into Form 1096.
Copy 1 got to the state department of revenue. The contractor receives Copy B for their taxing purposes. You can keep Copy C for your records. Storing the document on record can help you verify tax payments and documentation. If the IRS decides to audit you, it's vital to quickly present these verification documents.
You can easily submit this form electronically. Typing leaves no ambiguity, and a recipient quickly obtains your records. You can also mail your forms, but they take longer to deliver. You must write clearly on the form to avoid any confusion.
What Your Contractors Need to Do with the 1099-NEC Form
Once you submit your 1099-NEC Form to the IRS, the process doesn't stop. Each contractor also has responsibilities pertaining to the 1099-NEC Form. Contractors must include their payments on their tax returns. Even if an individual payment falls below $600, it must get included.
Contractors receive 1099-NEC Forms because their cumulative earnings from the company exceed $600. Independent contractors must pay their tax returns and self-employment tax. They will receive a Form 1099-NEC similar to an employee's W-2 form.
Get Help with Filing 1099-NEC Forms
The tax season can quickly turn into a nightmare. Business owners must assemble the right paperwork and ensure nothing goes missing. A single mistake can warrant questions from the IRS and trigger an audit.
A helping team makes tax season more doable. This team can fill out your 1099-NEC forms and other tax documents. The right team can provide guidance, so you capitalize on deductibles and other perks.
The Fondo team helps business owners navigate through tax season. We help you file taxes for your startup and handle 1099-NEC Forms. Our tax team will assist you throughout the process so you can concentrate on other business objectives. For inquiries, reach out through tryfondo.com and get an instant quote.
