Unless you are just getting started with your e-commerce business, you have likely heard of Form 1099. It’s one of the few tax form numbers we can throw out in a discussion with non-tax people and not be met with a look of complete confusion - complete boredom, yes, but at least not complete confusion.
About a year ago, we posted a blog on the Basics of Form 1099. Today, we are here to update you on the new Form 1099-NEC, a form for non-employee compensation. When we say “new” we mean new like the way mom jeans from 1990 are the “new” fashion. Form 1099-NEC was originally created back in 1982 but became relevant again for certain payments made to non-employees in 2020. Form 1099-NEC essentially replaces box 7 on Form 1099-MISC, which is where businesses used to report non-employee compensation.
If your e-commerce business uses contractors or gig workers, paid professional service fees to attorneys or accountants or paid commissions to nonemployee salespeople, here’s what you need to know.
Who does Form 1099-NEC apply to?
All businesses must file a Form 1099-NEC for nonemployee compensation if the following conditions are met: • A payment is made to someone who is not your employee. • A payment is made for services in the course of your trade or business. • The payments made to the payee were at least $600 or more for the year.
In addition, you must also file Form 1099-NEC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment (i.e., even if less than $600). Are there Exceptions?
Some payments do not have to be reported on Form 1099-NEC, although they may be taxable to the recipient. Payments for which a Form 1099-NEC is not required include certain payments to a corporation and wages paid to employees (report on Form W-2, Wage and Tax Statement).
In addition, payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity and are not subject to reporting on Form 1099-NEC, for example, if you paid contractors through Paypal, you likely won’t have to provide that contractor with a Form 1099-NEC. Don’t use Form 1099-NEC to report personal payments - only use it for payments related to your trade or business.
When and how can you file Form 1099-NEC?
In order for you to file a Form 1099-NEC for your contractors, you will need to collect the following: • For US resident payees: Form W-9 (Request for Taxpayer Identification Number), to report independent contractor payments. • For non-US resident payees: Form W-8BEN or W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting), to prove they reside outside of the United States.
After you have this information, Form 1099-NEC can be filed electronically with the IRS or can be mailed in to the appropriate IRS Service Center by January 31 each year (February 1 in 2021, since January 31 falls on a Sunday). When filing, provide Copy A to the IRS and Copy B to the contractor.
Failure to file these forms in a timely manner can result in filing penalties. If you can't meet the deadlines, it's best to ask for an extension - do this by submitting Form 8809.
Word to the wise - Don't forget to check your state filing requirements for 1099 forms. Some states, such as Florida, Nevada, New York, Texas, and Washington, ensure that the IRS forwards them relevant electronically filed forms. What about Form 1099-MISC? Does it still exist?
Form 1099-MISC still exists if you paid more than $600 during a calendar year to an individual or company for certain other payments that are not non-employee compensation, such as: • Rent payments, • Prizes and awards, • Other income payments, • Medical and health care payments, or • Nonqualified deferred compensation.
Need assistance? For ecommerce businesses looking for accounting (i.e., bookkeeping or tax) assistance, including dealing with specific eCommerce accounting issues, such as integrations with your online stores (like Shopify and Amazon) and your payment gateways (like Stripe or AfterPay), Finaloop is happy to help. We are a one-stop shop for all your ecommerce accounting needs.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.