When working with vendors, there is more to IRS compliance than just cutting a check and keeping a record of their invoice. You also need to know which services to report.
For example, if an organization pays a guest speaker, auto mechanic, or landlord, you typically need information from them before sending a payment. These examples (and more) often bring confusion to organizations on what exactly to do when paying vendors.
In this article, we answer nine common questions organizations ask about paying vendors. Our answers will explain:
- The purpose of the IRS forms.
- When to use them.
- The type of vendors the forms apply to.
Just following these steps will be a big help to properly managing payments to your vendors.
1. What types of vendor payments are reported to the IRS?
Not all payments to independent contractors are required to be reported to the IRS. Proper reporting to the IRS will help avoid headaches for your contractor and your organization.
Payments made to vendors for rent, royalty fees, prizes, and non-employee compensation are required to be reported to the IRS on a Form 1099.
There are several types of 1099s for reporting different types of payments. Here we will discuss the MISC and NEC forms.
Form 1099-MISC and 1099-NEC are required to be filed with the IRS when $600 or more is paid to a vendor during a calendar year. This applies to vendors who are individuals, sole proprietors, and partners (when not taxed as a corporation).
However, there are a few exceptions.
- Payments to attorneys are an exception. Attorneys will always receive the Form 1099 whether their firm is incorporated or not.
- If your vendor is a corporation or an LLC taxed as a corporation, a 1099 is not required.
- Form 1099 is also not required if vendors are paid by credit card.
2. Why do we need to file Form 1099s?
The purpose of Form 1099 is to allow the IRS to better track the amount of income that should be reported to the IRS by businesses and individuals. Form 1099s may also assist independent contractors in reporting the correct amount of income on their tax return.
3. What is reported on a Form 1099-MISC?
There over a dozen types of payments that are included on the Form 1099-MISC. The three boxes most commonly used are:
- Box 1 to report amounts paid for rent, which includes real estate, machinery, and equipment rentals.
- Box 2 to report royalty payments, which includes royalty fees paid to franchisors.
- Box 3 to report other income, which includes prizes and awards where no services were provided as well as wage payments of deceased employees to beneficiaries.
Remember, 1099s are only required when payments total at least $600 in a calendar year to non-corporations and individuals. If a vendor doesn’t fall into this category, a Form 1099 typically is not required.
4. What is NEC, and what is reported on a Form 1099-NEC?
NEC stands for non-employee compensation. Non-employee compensation includes payments to individual contractors for services only (unless they provided both services and parts/materials) and commissions where services are performed.
Beginning in 2020, Form 1099-NEC is used in place of Form 1099-MISC to report payments for services of at least $600 in a calendar year to non-corporation businesses, individuals, and attorneys.
Common recipients of Form 1099-NEC are attorneys (always required even when incorporated), architects, accountants, auto maintenance shops, landscapers, and construction subcontractors.
5. Are any payments not reported on Form 1099?
Under an accountable reimbursement plan, expenses reimbursed to contractors do not need to be reported on Form 1099.
Please review guidance on the IRS website or consult our office to ensure your accountable reimbursement plan is set up correctly. Accountable plans are used to reimburse workers for travel expenses including flights, per diem, hotel, and mileage.
Payments to corporations (unless to an attorney), tax-exempt organizations, property managers, and scholarship recipients do not need to be reported on a Form 1099.
6. What’s the deadline for filing 1099s?
Form 1099-NEC must be filed with the IRS and furnished to the recipient by January 31st of the following year.
Form 1099-MISC must also be furnished to the recipient by January 31st of the following year, but you have until February 28th to file with the IRS (or March 31st if e-filing).
7. How do I gather the required information from our vendors before it’s due?
With a January 31st deadline, there is not much time to file 1099s. However, if you plan ahead during the year, you can produce accurate forms on a timely basis without the stress of scrambling for information at the last minute.
The most important step to take is to provide a blank Form W-9 to each contractor and require him or her to complete it prior to paying for their services. Paying a vendor without their tax identification number could cause the organization to owe 24% of the total vendor payment plus penalties and interest to the IRS.
Form W-9 is an informational worksheet filled out by vendors which helps determine if you need to file a 1099 and how to complete it. It includes the legal business name (or individual’s name), employer identification number (or social security number if an individual), and the business classification.
- The business name and identification number will help you furnish the correct information on your 1099s.
- The business classification will help you determine if a 1099 is required to be filed.
It’s very awkward and time-consuming to contact vendors to complete a Form W-9 after you have paid them. We recommend preparing vendor packets that include:
- A W-9 form
- Basic contact information
- And payment terms.
If you have pre-existing vendors without W-9s, now is a good time to gather this information before the pressure of a deadline.
The Form W-9 saves time spent with vendors trying to track down the required information. It also saves your business from paying costly fees for not reporting 1099s or for reporting incorrect information.
8. What if a vendor does not provide a W-9?
Unfortunately, vendors are not always responsive to completing a W-9, even after asking them several times. This is why it’s best to require one before you pay for their services.
However, even if you don’t receive the required information from your vendor, be assured that you have leverage.
According to the IRS, businesses who don’t receive a W-9 from their vendors (or the information required to correctly complete a 1099) should withhold 24% taxes from the vendor’s pay until all necessary information is obtained. This large amount of backup tax withholding is usually enough incentive for a vendor to provide you the information needed to file your 1099s. Organizations that fail to withhold the tax could be liable to pay this tax.
In addition, at the end of the year, if you have backup withholding you should file a Form 945 for the amount of taxes withheld.
9. How do I know if I should issue a 1099 or a W-2?
Another way to ask this question is “What are the differences between employees (W-2) and independent contractors (1099)?” There are several questions to consider that can help you make the best choice:
- Behavioral control – Who directs and controls the way the work is done? Independent contractors will have more control over how, when, and where the work is done, what tools or equipment is used, and where supplies are purchased.
- Financial control – Is the worker reimbursed for business expenses? How is payment determined? Does the contractor have opportunity for profit or loss in the company? Contractors are more likely to not be reimbursed for business expenses and are often paid a flat fee.
- Relationship of the parties – Does the worker have benefits such as insurance, vacation pay, or a retirement account? Is there a set end date for the worker or are they hired indefinitely? Independent contractors typically won’t receive employer-provided benefits and often have a contractual end date for services.
If you are still unsure which forms you should be filing, please contact us. We would be happy to help you.
Bonus Tips for Churches
Here are two additional questions we often hear, specific to churches.
1. We support missionaries financially. Do we need to file 1099s for them?
When the funds are sent to the mission agency on behalf of individuals, the funds will not typically require form 1099 reporting.
However, if the missionary does not work for an agency, or if funds are sent directly to the missionary, the church needs to file a Form 1099-NEC when payments made to an individual missionary are at least $600.
If you work with individual missionaries who are not US citizens, you do not need to issue a 1099 on behalf of the individual. However, there may be requirements to check the Department of Treasury list of terrorist organizations (see our office for more details).
2. We have guest speakers at our church, and we pay them honorariums or collect an offering for them. Are they considered independent contractors?
Guest speakers are typically considered independent contractors and should receive a 1099 if they were paid at least $600 during the year.
You may want to consider having all guest speakers fill out a W-9 even if they are not expected to earn more than $600 in an engagement. That way you are covered in the event they come back later in the year to speak again.
We hope this article helped you better understand managing your vendor and contractor payments. With this information, you should be better equipped to properly manage your vendors, create greater efficiencies, and avoid penalties from the IRS.
We know this is an important topic given the short timeframe you have to prepare them and the need to do it right without the hassle of re-filing or incurring penalties from the IRS. If you would like us to help you with the filing of your 1099s, or if you would like assistance with this subject, please contact our office. We are here to help you.
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The author is not engaged by this text in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax, and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason, the accuracy and completeness of this information and the opinions based thereon cannot be guaranteed. Before taking any action, all references and citations should be checked and updated accordingly.