Are you feeling unsure about how to fill out Forms 1099-NEC and W-9? When the time of the year rolls around to prepare these forms, you might struggle to remember how exactly to go about it. In this article, I’ll explain how to fill out Forms 1099-NEC and W-9.
Form 1099-NEC for Non-Employee Compensation
Non-employee compensation is reported in Box 1.
What to report for non-employee compensation
(Here is a handout where you can take a look at the links that I have provided to the IRS instructions.)
[Video 0:36] The first thing we need to report for non-employee compensation is services performed by someone who is not your employee, including parts and materials. According to the IRS instructions, “services performed by someone who is not your employee” includes parts and materials.
On page 10 of the instructions, we also see that non-employee compensation of $600 and more should be reported, including fees, commissions, prices and awards for services performed as a non-employee and other forms of compensation for services performed for your trade or business by an individual who’s not your employee.
Bear in mind that there are exceptions for corporations such as C-Corps, S-Corps, and LLCs taxed as C-Corps or S-Corps. You also need to report payments to an attorney in Box 1 as well, whether they’re corporations or not.
[Video 1:40] Below you can see a cheat sheet I put together for the 1099-NEC form.
You report non-employee compensation for services and payments greater than or equal to $600.
You will send 1099s to sole proprietors, LLCs and partnerships. You’ll also send them to attorneys for payments made for professional services, even if they’re set up as a Corporation. Lastly, you will also send 1099 for payments made via cash checks, wires, ACH, and Venmo for personal accounts.
But you don’t send 1099s to C-Corps or S-Corps or sole proprietors taxed as S corporations. You also don’t send 1099s for payments made via credit cards, debit cards, gift cards and payments made via third party networks.
What are third party networks?
Third party networks are payments made via PayPal, merchant services such as credit cards, Venmo for business accounts, and other such services. Third party payment networks are responsible for issuing the 1099-K form to recipients.
For 2021, third party networks have to follow specific rules. The 1099-K rules state that third party networks need to send 1099-Ks for transactions that exceed or equal $20,000 and exceed or equal 200 transactions.
However, for 2022, the 1099-K rules have changed and third party networks need to send 1099-Ks for for transactions that are greater than or equal to $600.
You can read more about third party networks in the handout [linked here] that goes with this article.
(The handout has a link to download Form W-9. You’ll also find links to services that will help you to automate requesting W-9 forms from vendors. One is W-9 Manager, and the other one is Track 1099.)
As a best practice, you should obtain a W-9 form from every vendor, whether they’re providing products or services. However, as a minimum requirement, I would highly encourage you to obtain W-9 forms from all non-employees who provide services.
A closer look at Form W-9
[Video 4:09] Below you can see what Form W-9 looks like. The highlighted fields are the ones you need to fill out.
The first example, in Box 1, is the person’s name. Note that this should be the name as shown on their income tax return. Either the individual name or the business name needs to go in Box 1.
In Box 2, they would need to enter a business name or disregarded entity name if it’s different from the one above. An example of this situation would be a person whose name in Box 1 is John Doe. He’s doing business as John’s Marketing Services, so that is what he’ll write in Box 2.
Finally, they will need to fill in their address, city, state and zip code, plus their Social Security number or employer identification number. You must have this information.
Once all of this is filled out, they’ll need to sign the form and date it.
How to review Form W-9
How do we determine whether a vendor is eligible to receive Form 1099-NEC?
In this form, we have Jane Smith doing business as Designs by Jane Smith. If Jane fills out the form and indicates that she is:
- an individual sole proprietor, or
- a single-member LLC, or
- the business is a partnership or trust and estate, or
- an LLC taxed as a partnership,
then Jane is eligible to receive Form 1099-NEC.
In order to determine whether Jane should receive Form 1099-NEC, you must follow the criteria that I mentioned above. So, for example, if Jane is eligible to receive Form 1099-NEC, but you only paid her $300, she is not eligible to receive Form 1099-NEC because she didn’t meet the criteria of being paid $600 or more.
In this example, we have Jane Smith Corporation. If Jane Smith Corporation fills out the box for being set up as a C Corporation, S Corporation, or an LLC taxed as a C Corporation or S Corporation, then Jane Smith Corporation is not eligible to receive a 1099-NEC.
But there is an exception. Attorneys are eligible to receive Form 1099-NEC even if they are set up or taxed as corporations – whether it’s a C corporation or an S corporation.
And there you have it: my quick explanation of Forms 1099-NEC and W-9.
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This post originally appeared here 5 Minute Bookkeeping