If your eCommerce business has already used outside contractors for services, such as legal consulting or advertising contractors, you're likely at least vaguely familiar with IRS Form 1099.
There are lots of different types of 1099s but in this article, we are going to cover the most common Form 1099 for eCommerce businesses - the new Form 1099-NEC, a form for reporting non-employee compensation.
Of course, when we say “new” we mean new like the way mom jeans from 1990 are the “new” fashion. Form 1099-NEC was created back in 1982 but became relevant again for certain payments made to non-employees in 2020. Form 1099-NEC essentially replaced 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, pays professional service fees to attorneys or accountants, or pays commissions to non-employee 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 related to your business; and
- The payments made to the contractor were at least $600 or more for the year.
You must also file Form 1099-NEC for any person that you withheld federal income tax (report in box 4) under the backup withholding tax 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, even though the payments may be taxable to the contractor that receives them. A Form 1099-NEC is not required for:
- Certain payments to a corporation
- Wages paid to employees (report the wages on Form W-2, Wage, and Tax Statement)
- Payments made with a credit card or payment card
- Certain other 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 into the appropriate IRS Service Center by January 31 each year. When filing, provide Copy A to the IRS and Copy B to the contractor. Failure to file these forms on time 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,
- Attorney payments to someone else's lawyer (e.g., settlement payments),
- Medical and health care payments, or
- Nonqualified deferred compensation.
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*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.*