Tom Talks Taxes - January 10, 2022
Avoid four common Form 1099-NEC errors in the next few weeks
If a business pays a nonemployee worker $600 or more during the calendar year, then the business should issue Form 1099-NEC, Nonemployee Compensation, to the worker no later than January 31 of the following year.
In my experience, there are many Forms 1099-NEC that are issued that are either not required or have incorrect amounts reported. Many of you may say that there is no harm in reporting payments for which there is no requirement to do so, while there are penalties for not complying, so it is better to be “safe than sorry.”
I do believe there are harms in overreporting payments to the IRS:
The IRS receives millions of information returns that it is not required to receive, and this is a burden on overall tax administration.
Recipients of information reporting forms are more likely to receive erroneous IRS notices or inquiries into their tax return.
Valuable practitioner time during peak season is wasted on preparing extraneous forms.
Clients pay for unnecessary tax reporting.
Clients should absolutely make receipt of a Form W-9, Request for Taxpayer Identification Number and Certification, a requirement prior to issuing payment to a worker. This protects both the client and the professional when making information return reporting decisions.
I encourage you adopt the four practices outlined below when preparing Forms 1099-NEC over the next few weeks.
Do not issue a Form 1099-NEC to a corporation or a limited liability company (LLC) taxed as a corporation.
It is not required to issue a Form 1099-NEC for payments to a corporation; however, payments for attorney’s fees and certain medical services must still be reported. See Treas. Reg. §1.6041-1(p)(1).
Do not issue a Form 1099-NEC when a payment is made via credit card, PayPal, or other third party networks.
These payments are reported by the payment settlement entity on Form 1099-K; therefore, issuing a Form 1099-NEC for the same payment leads to double reporting of the same income. It does not matter whether the worker has sufficient transactions to receive a Form 1099-K from the payment settlement entity. See Treas. Reg. §1.6041A-1(d)(4)(i).
The above regulation has the following example:
Service-recipient A, in the course of its business, pays remuneration of $600 to service provider B by credit card for services performed by B. B is one of a network of unrelated persons that has agreed to accept A's credit card as payment under an agreement that provides standards and mechanisms for settling the transactions between a merchant acquiring bank and the persons who accept the cards. Merchant acquiring bank Y is responsible for making the payment to B. Under paragraph (d)(4)(i) of this section, A is not required to file an information return under section 6041A(a) with respect to the transaction because Y, as the payment settlement entity for the payment card transaction, is required to file an information return under section 6050W.
This will be especially important for tax year 2022 information reporting, as the Form 1099-K reporting threshold is now reduced to $600 due to changes from the American Rescue Plan Act.
Do not issue a Form 1099-NEC to a tax-exempt organization.
If the organization is tax-exempt under §501(a), then no Form 1099-NEC needs to be issued to it for services provided. See Treas. Reg. §1.6041-1(p)(2).
Do not issue a Form 1099-NEC that includes the value of expenses reimbursed to the worker under an accountable reimbursement plan.
If a worker provides receipts and gets reimbursed for a business expense, then the reimbursement amount is not reported on Form 1099-NEC. If a worker receives a payment for expenses without substantiation, then it is generally included on Form 1099-NEC. See Treas. Reg. §1.6041-3(h)(1).
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