Furnishing and filing Forms 1099 (“1099”) can be time consuming, confusing and anxiety driven for many companies after the end of the tax year. If you haven’t processed a 1099 lately, need a refresher, or have a few questions, you may find these tips from our expert panel helpful.
You’ve likely seen the shift as the workforce changes from the traditional, full-time employment model to an on-demand extended workforce model. Businesses across the globe, big and small, have taken note of this next iteration of the subscription economy and are moving purposely to this new way of managing their workforce.
As with any significant change in business process, there are new rules to learn. One of the biggest challenges for businesses in navigating this trend is determining the classification of workers (e.g., employees, independent contractors, temporary agency workers, gig workers) and where the tax liability falls within the business/contingent workforce relationship. We reached out to several experts -including a few here at ADP- and asked them to share their top tips and tricks to seamlessly process Forms 1099.
Here’s what they had to say:
As a baseline, we define 1099s as a series of information returns that report various types of payments made in the course of doing business.
Q: Are there different kinds of 1099 forms? Which ones are relevant to my contingent workforce?
Our Take: Yes, there are many types of Forms 1099. For reporting non-employment income paid to contractors, businesses use Form 1099-NEC, Nonemployee Compensation. For other types of payments or transactions, you may need to use the Form 1099-MISC, Miscellaneous Income, and/or , and the 1099-K, Payment Card and Third-Party Network Transactions.
For your contingent workforce, you would generally issue Form 1099-NEC to each person to whom you have paid at least $600 in services performed (not as an employee) during the tax year and file 1099s with the IRS. It’s important to review IRS instructions to ensure you use the appropriate Form 1099.
Q: What is the threshold to determine if my contractor is a 1099 qualified contractor or another classification?
Megan Gerhardt, CPA, Outsource CFO: Any independent contractor or company who received $600 or more and that you are paying with cash, check or wire transfer, would receive either the Form 1099-MISC or Form 1099-NEC. If those payments were made with a credit card or payment card, they would be reported on Form 1099-K and the credit card processor is responsible for issuing that to the contractor.
Exceptions, however, apply to a C-Corporation or S-Corporation. They do not get a 1099 and the tax liability is on the corporation to report earnings. However, it is recommended that you obtain a Form W-9, Request for Taxpayer Identification Number and Certification, from any contractor you do business with, regardless of their corporation status.
It is not always immediately apparent on what their filing status is, and the W-9 protects your business as the form has a disclaimer indicating the business requesting the form is not subject to backup withholding. The IRS can (and will) come to you to ask for backup withholding for contractors you have contracted with in the event the contractor fails to pay student loans, child support, or even failure to file their own IRS taxes and the disclaimer removes you from liability.
Our Take: It is important to validate every Social Security Number (SSN), Employer Identification Number (EIN), and/or Tax Identification Number (TIN) prior to filing the 1099. If the IRS receives the form and finds a mismatch, they will issue a CP2100 Notice. The first issuance will be a warning, but if the same erroneous information is submitted subsequent times, penalties will start to apply. Businesses can verify contractors TIN, SSN, or EIN status through the IRS.
Q: Are there penalties for missing the deadline?
Megan Gerhardt: Yes, penalties for late furnishing and filing of 1099s may apply. There are two deadlines that businesses need to be aware of for 1099-MISC and 1099-NEC. The first is that the recipient must receive the statement by January 31, penalties may apply if the form is postmarked after that date. The second deadline is for filing 1099s with the IRS. For 1099-MISC file by February 28 (March 31, if filing electronically), and for 1099-NEC file by January 31 by paper or electronically. Penalty fees depend on the size of the return and how late the return is, ranging anywhere from $50 to $3.2 Million. A full description of the penalties and qualifications can be found on the IRS website.
Our Take: To protect yourself be sure to furnish and file Forms 1099 by the end of the business day on the applicable due date.
Q: How can I streamline the 1099 filing process for my contingent workforce?
Our Take: If you are filing more than 250 1099s, you are required to file electronically. If it’s below, you can choose to file via paper though you may find e-filing easier and faster. Something else you should be aware of is that you must file 1099s with applicable states and the IRS. Some states collaborate to file electronically with the IRS but some don’t. Be sure to check the requirements in the state where you need to file.
See here a list of states that participate in a combined filing program for 1099s.
Q: What happens if I fail to file 1099s for my contingent workforce?
Megan Gerhardt: If it is determined that you have failed to file intentionally, the penalties are significant, and the IRS has no maximum penalty. Minimum penalties for intentional disregard range from $250-$550 per form.
Q: What if my entire workforce is a contingent workforce? How does that change my filing process and business liabilities?
Megan Gerhardt: If your entire workforce consists of contractors, it doesn’t change the process or liability.
Q: What happens if a contractor changes their SSN to an EIN during the tax year?
Our Take: You will need to send a separate 1099 to the contingent worker for both the SSN and EIN with the total payments for each number, as payments are still counted for both.
Q: What if I have a 1099 contractor that is a U.S. citizen but works overseas?
Megan Gerhardt: Your business is required to report payments on the appropriate 1099. They are still considered a U.S. citizen and are classified as an “expat.” The contractor located overseas should contact a tax preparer in their country of residence as they may have to pay taxes to both countries.
Q: Are there any requirements for specific industries?
Megan Gerhardt: Any entity, including individuals that engage contractors, is required to furnish and file 1099s their contractors who have exceeded the threshold. There is no special exception or changes for a business depending on their industry or status (e.g., non-profit, for profit, etc).
Looking for more best practices to help organize, manage, and pay your 1099 contractors? Download our guide here to learn more.
Disclaimer: This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. WorkMarket, an ADP company does not warrant or guarantee the accuracy, or reliability of the content on this blog.
*References:
IRS General Instructions for Certain Information Returns (2023)
Instructions for Forms 1099-MISC and 1099-NEC (01/2022)
Understanding Your Form 1099-K
