I OWN A SMALL BUSINESS; DO I NEED TO FILE A 1099-MISC OR 1099-NEC FORM?
When should a small business file the 1099-MISC or the new 1099-NEC (Nonemployee compensation) forms?
A small business needs to file either/both forms when they make payments in the normal course of trade or business to a vendor. This also includes Non-profit organizations. The form 1099-NEC is a new form for this tax year, and it is important for small businesses to be aware of the changes. Basically, the new form takes Box 7- Nonemployee compensation from the 1099-MISC and creates a more simplified form with the 1099-NEC. Either form is required to be filed if you have paid $600 or more in the normal course of trade or business and you have obtained a W-9 form that shows the type of vendor you have paid.
The following will explain the similarities and differences, how you determine who to send a 1099-MISC or 1099-NEC form to and when to file these forms.
Similarities and Differences
The similarities relate to the business and vendor information that are placed on the form, when you are required to file the 1099 forms to the vendors and to the IRS, and if you paid the vendor $600 or more. Please note that if you paid a vendor under the threshold limit of $600, you are not required to send them the forms, but the vendor is still required to report that income.
It is easier to explain what the 1099-NEC form is used for since it is a simplified form. The following list includes what is to be reported as Nonemployee compensation that you may pay a vendor in the normal course of trade or business:
- Other Compensation for Services (including attorney fees you pay to hire an
attorney, but not settlement fees)
You will see on both forms that the information for your business and the vendor has not changed and it is in the same general area. The main change on the 1099-MISC (left-hand side) is related to the boxes and what income goes where on this form. As you can see, Box 7 is where Nonemployee compensation use to be and has been replaced.
Now let us look at the 1099-NEC (right-hand side). As you can see it is simplified to just include the Nonemployee compensation amount you would pay to a vendor.
How do you know who to send either form to?
So, you know which form to use to report payments made in the normal course of trade or business, but how do you determine which vendors you should be filing 1099’s for?
This is where all small businesses should be obtaining a W-9 form from their vendors. This will help you determine if you need to send your vendor a 1099-NEC or MISC. If you make payments in the normal course of trade or business to a corporation (C or S) and any limited liability company (LLC) that is treated as either a C or S Corporation you do not need to send them either a 1099-MISC or 1099-NEC. Basically, a sole proprietor, partnership or LLC that is not a C or S corporation should be receiving either form. Here is what the W-9 form looks like which you can download from www.irs.gov:
It asks for the vendor information, type of business, social security or federal EIN, address, and a signature from the vendor. The best practice would be to obtain a new W-9 form annually for your existing vendors and when you begin to work with a new vendor. If your existing vendors have any changes to their business, like an address change, you should obtain a new W-9 at that time.
The IRS has cracked down on small businesses not properly filing the 1099 forms so please be aware of the time frame. All 1099-MISC and 1099-NEC forms need to be postmarked by January 31st (this year it will be February 1, 2021 since January 31st falls on a Sunday) to the recipients and the IRS.
It is important that you are properly tracking your vendors for 2020 and review whether you have a W-9 on file to determine if they should get a 1099-MISC or 1099-NEC. You still have plenty of time to obtain the W-9 and review your payments to vendors. Start now so you are not rushing in January to meet the deadline for filing.
Remember if you are not sure if you should be reporting and filing either 1099 form, you can go to www.irs.gov and search on the forms or feel free to reach out to me on my website at www.yourfinancialmaven.com.