Article Highlights:

  • Independent Contractors
  • Non-employee Compensation
  • 1099 Filing Requirement
  • Due Dates
  • Penalties
  • Form W-9 and 1099 Worksheet

If your business engages the services of an individual (independent contractor), other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).  

Note: The IRS has cautioned taxpayers who are treating rental activities as a trade or business for purposes of claiming the 20% passthrough deduction that they are required to issue 1099-MISC forms to their services providers who meet the $600 test for those rental activities.  

Because so many fraudulent tax returns are filed right after e-filing opens up in January, the IRS requires 1099-MISCs for NEC to be filed by January 31 and will not release refunds for individual income tax returns that include the earned income tax credit until the NEC amounts can be verified.

Thus, the due date for filing 2019 1099-MISC forms for NEC is January 31, 2020. This is also the same due date for mailing the recipient his or her copy of the 1099-MISC.

It is not uncommon for a business or rental property owner to have a repair person go out early in the year, pay him or her less than $600, use his or her services again later in the year, and have the total paid for the year be $600 or more. As a result, the business or landlord may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, if you own a business or are a landlord, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, then it would be a good idea going forward to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you.

The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.

The penalty for failure to file a required information return due in 2020, such as the 1099-MISC, is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2020, and it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2020. If you are required to file 250 or more information returns, you must file them electronically.

In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2019 need to be sent to the IRS by January 31, 2020. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms).

Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. Payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box 7 has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2020, while the copy to the government is due by February 28, 2020.

If you have any questions, please call. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s.