Are you a contractor yourself or do you employ contractors? There have been some updates due to the American Rescue Plan when it comes to who you need to send a Form 1099-NEC to, so please read this one so you are up-to-date and prepared for January!
NOTE: All 1099-K’s and 1099-NEC’s must be sent to contractors, the IRS, and some states by January 31st.
WHO GETS A 1099-NEC?
A 1099-NEC gets sent to an independent contractor you paid $600 or more during the tax year. Due to the American Rescue Plan, however, you are only recording payments to contractors if you paid them via ACH, EFT, direct deposit, cash, or check. More on this below.
In order to send them a 1099-NEC, ensure you have a W-9 from them before the New Year, so it doesn’t hold up your process come January. If you miss the January deadline, your penalty varies from $50 to $280 per form, depending on how long past the deadline the business issues the form. There is no maximum on $$ you may owe.
If you are a contractor, ensure your employer has an updated W-9 for you on file! If you’ve moved, got a EIN number, or change of address, you want to make sure they have your most current information.
A few of my clients have contractors that are not US citizens and do not work in the US. This means you do not owe them a 1099-NEC at the end of the year and they do not fill out a W-9. There is a different form you will want them to fill out for you to keep in your records in case the IRS ever asks. For independent contractors outside of the US & not US citizens, it is Form W-8 BEN and for businesses it is Form W-8 BEN-E.
HOW 1099-K’s IMPACT 1099-NEC’s
Depending on HOW you paid your contractor, you may not be putting everything you paid them on the 1099-NEC because of 1099-K’s.
A 1099-K is a form issued by credit card companies and 3rd party payment processors, like Venmo, Cash App, PayPal, and Stripe. The 1099-K’s are used to report credit cards, debit cards, payment apps (venmo, stripe, paypal, shopify, etc.) and gift cards. It is now reporting payments over $600 (it used to be if you had gross payments $20,000 + and more than 200 digital transactions).
A 1099-NEC is a form that a business sends an independent contractor if they paid them over $600 via ACT, EFT, Direct Deposit, Cash, or Check.
**You used to have to send a 1099-NEC (previously 1099-MISC) for the total amount you sent a contractor.
This may/will greatly reduce the burden of you submitting 1099-NEC’s to your contractors, since these 3rd party payment processors will be reporting all credit, debit, gift card, payment app payments.
EXAMPLE:
Contractor X received $1,000 during the year. $750 of that was paid to them via a credit card and $250 was paid to them via ACH transfer.
Previously, the business owner would need to send a 1099-NEC in the amount of $1,000, BUTNOW, the credit card company will be sending Contractor X a 1099-K and the business owner who contracted & paid Contractor X will not need to send them a 1099-NEC, since their ACH payment was less than $600.
WHAT IF YOU RECEIVED $600+ ON A 3RD PARTY PAYMENT
PROCESSOR FOR PERSONAL REASONS?
Fear not. The only accounts who will be issued 1099-K’s are if you have a business/merchant account (think PayPal business, Venmo business, etc.) or if someone pays you to your personal account and they tag the transaction as a “goods and service” rather than “friends and family”. This is why Venmo and other platforms started asking you if a payment you make is for a purchase.
Because of these changes it is more important than every having a correct set-up on all platforms. Self Employed individuals have a tendency to co-mingle their accounts (mixing business & personal transactions), which can lead to messy books and knowing who may or may owe you what. Keeping track of who pays you & how is very important – you don’t want to get a 1099-K and also a 1099-NEC for the same payment! If you get it, so does the IRS.
*You may be thinking that this new requirement for 1099-K’s can allow you to not list certain income on your tax returns. Please don’t think this way – It won’t be worth the penalties if you get caught – I promise.
I hope this clears some things up for you! As always, if you need any help or want to book a consultation with me you can reach out to me.
Lotte
Hey, I'm Lotte, and welcome to my blog, She Means Business.
I'm an expert bookkeeper and business/operations manager who loves supporting female entrepreneurs so they get their time back. Over the past 5 years I've supported dozens of women through my services, and I hope this blog can help you. Browse & Enjoy!
