If you are a small business and are unsure about who you are required to send 1099’s and 1099-NEC to this January 31st deadline, read on.
Since 2020, form 1099-NEC (non-employee compensation) replaces prior years’ Box 7 of 1099-MISC. You could previously report non-employee compensation along with other miscellaneous income using that form, but no longer.
Here are 3 easy keys to understand the process of 1099s for your small business for this 1099 season in 2023:
1099-NEC for Independent Contractors, Self-Employed Individuals, Business Vendors
The first key to understand 1099s is the notion that most 1099s you’ll be required to send out will be to independent contractors. You’ll be sending them out to them for the services they’ve provided for your business. If you’ve purchased products from a vendor, that is not considered a service performed. Therefore in these cases they do not meet the criteria for requiring to send a 1099-NEC.
The second key is that you’re not required to send a 1099-NEC if you’ve payed through 3rd-party payment processors. That means that if you’ve payed him with a credit card, Paypal, or Quickbooks Online, there’s no 1099 requisite. Third-party payment processors include services like Venmo, Cash App, and Paypal.
Cash, Check, ACH Direct Deposit, and Zelle
Conversely, if you have made payments of $600 USD or more by cash, check, or ACH (direct deposit), then you would be required to send the 1099-NEC. **ALERT: even though you might think of Zelle as a 3rd party payment processor, for these purposes it is not. Since it acts the same way as a direct deposit or bank transfer, Zelle payments are under the 1099 requirement**
**Common mistake warning: make sure that the amounts you are including when you send the 1099-NEC are only those amounts you have payed the vendor in cash, check, ACH (direct deposit), wire transfer, or Zelle. DO NOT include what you have payed the vendor via credit card or 3rd party payment processors. Form 1099-K covers their payments which the third party deals with therefore you’re out of the picture for those amounts.**
Mind the Business Structure to Know Who to Send the 1099-NECs
Finally, easy key number three that only those vendors that are sole proprietors, partnerships, and otherwise unincorporated are included. The tricky part is when you see LLC, limited liability corporation. They can elect to be taxed as an S-Corp in which case they’re not required to be sent the 1099! So in those cases be extra diligent in requesting their W-9 and seeing if they are sole-proprietor, partnership, or S-Corp.
C-Corps and S-Corps are not required to be sent the 1099-NEC. A good indicator is if the put Inc. after their name. Nonetheless it’s never bad to err to the side of caution and ask them anyway.
This January 2023, the deadline to send the 1099s is January 31st. For more on the topic of 1099s check out our other blog posts where we are going into more detail about 1099s. There you’ll learn about the best ways you can navigate the 2023 1099 season. Here’s more on W-9s and how to deal with stubborn vendors who won’t give them!