1099-NEC guidelines for business owners
When a new vendor or subcontractor provides a service to your business for the first time, it is important to request a W-9 from them as soon as possible. By doing so, you will be able to confirm the vendors mailing information and EIN (Employer Identification Number) which is needed for 1099-NEC tax filings.
Tax form 1099-NEC is the IRS form used by businesses to report payments made to independent contractors, subcontractors, freelancers, sole proprietors and self-employed individuals for services they provide to the business.
Businesses are required to provide annual 1099-NECs forms to the following:
Individuals, partnerships, Limited Liability Companies (LLC) and Limited Partnerships (LP) who receive annual payment of $600 or more for services provided to the business.
Any foreign vendor or sub-contractor who received annual payment of $600 or more for work done in the United States.
Annual payments over $600 made by the business for legal services
There are some exceptions which do not require 1099-NEC forms. Businesses do not need to report payment for services if:
The person who received payment is an employee of the business
Payment was made to a vendor who operates as an S or C-Corporation (this status would be indicated on their W-9) unless the payment was for legal services.
Payments made to the vendor were less than $600 for the year
Payment for services was made by credit card, debit card, or gift card (card issuers will report these payments)
Services were paid for using a third party payment network such as PayPal or Venmo (as long as the business confirms they indicated the payment was a business payment when it was made on the third party platform)
The service paid for was for personal purposes and not a business expense
The person who was paid is not a citizen of the United States and performed all of their work outside of the United States.
The annual due date for payers to complete Form 1099-NEC requirements is January 31st. Penalties can add up quickly for businesses who do not complete Form 1099-NECs by this deadline, and can range from $50 to $110 per form, depending on how long the delay is. And if a business knowingly disregards sending 1099-NEC’s they can be assessed a minimum penalty of $550 per form (with no maximum penalty).
If a business owner cannot obtain or verify a vendors EIN (to confirm 1099-NEC requirements) they are not prohibited from doing business with that vendor by any tax law. However, they are required to start withholding federal taxes immediately to ensure all appropriate taxes are paid to the IRS for the work. Efforts should be made in writing at least 3 times to obtain W9 information from a vendor. If a business is unable to obtain a W9 and verify a vendors EIN number after three attempts, they will need to withhold 24% of all payments made to the vendor and pay this amount directly to the IRS.
