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Working With Contractors: When Do You Need to Issue a 1099-NEC Form?

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You will often use a contractor when you have to complete a construction project or other types of projects. Working with contractors can be difficult, especially regarding the payment of taxes. 

The IRS makes it clear you have to differentiate between a contractor and an employee. You should know your contractor’s status when filing your tax returns. The 1099-NEC form reports non-employee compensation to contractors and is a replacement for the 1099-MISC forms.

In 2020, the IRS made it mandatory for businesses to file 1099-NEC forms. The following are situations when you need to issue the form: 

You Paid Some Who Is Not Your Employee

If you make any payment to someone who is not your employee, you must issue and fill out a 1099-NEC form. Knowing the designation of payment recipients is crucial for paying taxes when you are self-employed.

You can refer to the payment recipient as an independent contractor, freelancer, or small business.

The person you pay may use their name, sole proprietor name, or LLC name. The issue with an LLC is that they don’t typically tell you how they report their taxes. Therefore, ask the contractor if you are uncertain about issuing a 1099-NEC form.

You Made Payment From Your Business

You can either pay a contractor as an individual or as a firm. You may not have to report it in your taxes if you pay a contractor as an individual, but when you pay them as a business, you have to issue a 1099-NEC form.

Usually, the payment is for services rendered, but in some cases, the payment may be for items necessary to complete the project. Therefore, you have to report the payments when filing your business taxes.

You will also have to file a 1099-NEC for legal services regardless of the amount. Other than lawyers in corporations, you do not have to issue a 1099-NEC for a corporation.

You Paid Them A Minimum of $600 During The Year.

Your company must issue a 1099-NEC form if you make payments to a contractor for over $600 in a particular year. Independent contractors will have to report all payments on their tax returns, even those under $600, which will help the returns match.

Whether an individual or partnership, as long as it is over $600 in a calendar year, you must provide the form. The exceptions are when you make payments over $600 to pay travel allowances for employees or merchandise, freight, and storage. 

Completing Form 1099-NEC 

Now that you know when you should issue a 1099-NEC form, you should also know how to fill in the form. You should know that you can create a printable 1099-NEC form online.

You must provide certain information on the form, including your firm’s Tax Identification Number (TIN), name, and address. You will also need the contractor’s Tax Identification Number.

If applicable, fill in any federal and state income tax withholdings. To make the tax filing process easier for the contractor, you can fill in state income earned. 

Submitting Form 1099-NEC

When you issue a 1099-form, you must provide the form to various recipients. You will submit the first copy of the form to the IRS alongside form1096. You will send the second copy to the state’s department of revenue.

You will send the third copy to the contractor. It would be best to keep the final copy for your records. The deadline for filing1099-NEC forms is on the first of February so ensure you issue the forms before then. Electronic files are preferable if you submit 250 or more 1099-NEC forms to the IRS. 

Adhering to IRS regulations and guidelines is challenging for business owners, primarily the self-employed. Use the above resources to understand better when you should issue a 1099-NEC form. Getting help from a tax attorney should go a long way when filing the forms.

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