The IRS has re-introduced the 1099-NEC form for reporting non-employee compensation in an effort to smooth out the reporting process for contract labor and other related costs. Here are some of the main dos and don’ts of filing 1099-NEC. Do: File 1099-NEC Forms for Non-Employee Compensation The IRS requires reporting payments that are: made to someone who is not your employee, made for services in the course of trade or business dealings, or payments over $600 for the calendar made to an individual, partnership, estate, or even sometimes a corporation. Some examples of this include professional service fees to attorneys, accountants, or architects, fees paid between two professionals, payments for services, even parts and materials, and commissions. Don’t: Report Exceptions These exceptions do not need to be reported: payments for phone, freight, telegrams, storage, or merchandise and the like and payments for a foreign government, tax-exempt organizations, tax-exempt trusts, and payments to governments at the federal, state, and local levels. Do: Verify Recipient Taxpayer ID One of the first things you need to do is verify each recipient’s taxpayer ID. In order to complete the 1099-NEC for your contract workers, you must also have a form W-9 given to you by each recipient. Don’t: Use Form 1099-NEC for Personal Payments A big thing to remember about the new 1099-NEC form reporting is: don’t use the form 1099-NEC to report personal payments. Do: Mind Your Due Dates When filing and submitting these forms, remember the due date to distribute 1099-NECs to recipients is January 31 – though this date falls on a Sunday for 2021, so February 1 will be the deadline for the year. You must also be sure to file with the IRS by January 31 (again, February 1 for the year 2021). Don’t: Use Form 1099-NEC for Employee Wages In the same way that personal payments aren’t reported on the 1099-NEC, this form is also not for reporting employee wages. Make sure not to …
Filing As an Independent Contractor
If you were hired as a freelancer or independent contractor and your total earnings were more than $600, you will need to file taxes using the renewed 1099-NEC form for the tax year 2020. What is an Independent Contractor? An independent contractor is a person or business that provides goods or services under contract or verbal agreement. Though this agreement means the independent contractor works for another company, the independent contractor is not considered an employee of that company. Being an independent contractor gives you the freedom to set your own schedule or to supplement your day job income, but that means you are the only one responsible for tracking and reporting those freelance earnings on your taxes. Here are some tips to help you when filing as an independent contractor. 1099-MISC vs 1099-NEC 1099 forms are the most common forms used by businesses that hire independent contractors. In the past, Box 7 on the 1099-MISC is where businesses reported their payments to contractors, but starting in the tax year 2020, the IRS has renewed the 1099-NEC (non-employee compensation) form and that is going to take the place of the 1099-MISC for freelance wage reporting. Self-Employment Taxes Self-employment taxes are taxes consisting of Social Security and Medicare taxes for individuals who work for themselves - since you don’t have an “employer”, you have to account for these taxes yourself if you are an independent contractor. You determine your self-employment tax using Schedule SE on the Form 1040 or 1040-SR. The self-employment tax rate is 15.4% and consists of two parts: 12.4% for social security and 2.9% for Medicare. For 2020, according to the IRS, the first $137,700 “of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security Tax, or railroad retirement (tier 1) tax.” Self-employment taxes tend to be higher than traditional employee taxes …
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I Received A “B Notice.” Now What? + How To Avoid Them
To avoid receiving B Notices, it’s important to be proactive whenever you onboard a new non-employee. What Is A “B Notice”? A “B Notice” is part of the IRS’s Backup Withholding Program, which provides notices to payers (such as businesses) who file certain information returns with incorrect Taxpayer Identification Numbers (TINs), which includes Social Security Numbers (SSNs) and Employer Identification Numbers (EINs). These notices begin the backup withholding process. “Backup withholding” means withholding income tax from independent contractors or other non-employees. As a business owner, you receive the notice, but it is up to you to inform your independent contractor or other non-employee that they provided the wrong TIN number to you. The IRS cannot contact your contractor (the payee) because they have the wrong TIN number on file. What To Do With A B Notice When you inform the payee about this situation, you must do a few things: Send a copy of the B Notice to the payee and request that they fill out an updated W-9 form with their correct TIN and full name. It’s best if you provide them with the W-9 form. Begin withholding taxes immediately at the rate of 24% if: the IRS says the taxpayer ID is missing. you cannot find the payee. the payee refuses or fails to provide a TIN. the TIN is obviously incorrect (e.g. it’s not 9 digits). Double-check that the new W-9 form has a different TIN than the old form. At this point, the payee should send the W-9 to the IRS. If you receive a second B Notice, continue withholding income taxes. The payee is responsible for resolving the issue with the IRS directly. The IRS will inform you when the payee’s TIN has been corrected. At that point, you can stop withholding income taxes. What To Do After the TIN Is Updated After the matter is resolved, you need to pay the withheld taxes to the IRS, report them to the IRS using Form 945, and include the backup withholding …
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What’s the New 1099-NEC for Non-Employee Compensation?
The Internal Revenue Service (IRS) has introduced a draft version of 1099-NEC, a non-employee compensation form we haven’t seen since 1982. Starting in January 2021, form 1099-NEC will replace the non-employee portion of form 1099-MISC which covers earnings for independent contractors and a wide range of payments such as rent, royalties, prizes, awards and substitute payments. The former 1099-NEC had one box to report fees, commissions and other non-employee compensation paid to vendors who were compensated at least $600 in a calendar year. However, in 1983, the IRS moved away from the 1099-NEC in favor of form 1099-MISC. The Protecting Americans from Tax Hikes Act (PATH) of 2015 made several changes to how we file taxes, including moving the due dates for reporting non-employee compensation in Box 7 on form 1099-MISC to January 31. But that caused confusion. The due date companies were required to file with the IRS was due on February 28 (paper) and March 31 (electronic). But, they also had to send workers their W-2 and 1099-MISC by January. This meant companies would have to file twice to the IRS for the same payee unless they filed everything by January 31. It also created a window where refunds could be issued before the IRS could confirm reporting income leading to fraud. Essentially, the IRS is looking to streamline the process to report non-employee compensation by reinstating the 1099-NEC. The updated form eliminates the issue of separate filing dates. However, the 1099-NEC does not eliminate form 1099-MISC. The IRS still requires you to report the miscellaneous income received during the year. It will be reported in different places on your tax return. The biggest change is Box 7 on form 1099-MISC which is now being used for direct sales of $5,000 or more. The due date for issuing the new form to taxpayers and the IRS will be February 1, 2021 (since January 31, 2021 falls on a Sunday). It can be filed either by paper or electronic …
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