1099 Best Practices to Kickstart 2023
Below are some deadlines to keep in mind for 2023:
1099-NEC: January 31st, 2023
1099-MISC: February 28th, 2023 (if filed by paper)
1099-MISC: March 31st, 2023 (if filed electronically)
The January 31st deadline for vendors and the IRS to receive a copy of Form 1099-NEC is fast approaching. Many organizations tend to perform a 1099 analysis after the tax year ends, meaning they have only a month to perform the 1099 analysis, gather correct information, and send it to the IRS.
As a reminder, in late 2020, the IRS introduced the new Form 1099-NEC (Nonemployee Compensation) for reporting independent contractor income. Form 1099-NEC was designed specifically for payments to individuals, not on the payroll. It is for contract work that generally includes independent contractors, gig workers, or anyone self-employed who previously had their payments reported in Box 7 of the Form 1099-MISC.
All individuals who were paid more than $600 during the year for services they performed as a non-employee (unless the individual is registered as a C or S Corp.) should receive a 1099-NEC and have one filed on their behalf. All others, such as individuals or LLCs who were paid at least $600 during the year in rent, legal settlements, or prize/award winnings are required to get a 1099-MISC and have it filed on their behalf.
To avoid any letters from the IRS due to not reporting or incorrectly reporting social security numbers or tax identification numbers (TINs), attention to detail and completeness are crucial. However, gathering information from 1099 vendors can be time-consuming and frustrating as sometimes vendors provide erroneous TINs. Organizations are liable for any taxes that were supposed to be deducted and withheld.
1099 planning is necessary to make best use of your time and to prevent IRS penalties.
What can organizations do to prevent errors in completing form 1099? Here are five recommended steps to prepare for a better managed 1099 experience:
Determine whether the independent contractor is truly an independent contractor or an employee.
Provide a contract to the independent contractor. In NYC, the Freelancers Act requires any services over $600 to be written in a contract with the responsibilities or deliverables outlined, the duration, when payment will be made, and how much they will be compensated.
Gather correct business or personal information when sending out the contract to the independent contractor. Have the contractor complete a W-9 or a W-8BEN (for foreign contractors). If you decide to pay them without getting a W-9 or a W-8BEN, the organization may be responsible for withholding 24% of the payment, as per IRS section 3406(a).
Sync the 1099 data to your accounting system. Work with your accounting team to have the business information or personal information, including TIN, entered into the accounting system or system used to pay the independent contractors. This step will help the accountants with the year-end 1099 analysis by reducing the time spent reaching out to vendors or office personnel for W-9s or W-8BEN. Additionally, it will make the 1099 reporting flow more smoothly.
Verify the mailing address, email, and phone number. Determine which independent contractor may need a scheduled call or email during the tax year. For example, a graphic artist is more likely to move around than a corporation. You can include an address verification with a payment or have the individual submit an invoice with address, TIN, phone, and email.
Following the above steps will enable you and your team to have a better 1099 experience and minimize IRS letters and Department of Labor audits.