Can you believe that 2021 is almost over? With only a month left on the calendar, it’s almost time to start preparing your organization’s year-end tax forms. While many nonprofit organizations qualify for certain tax exemptions, you are still obligated as a business and employer to issue annual W-2 and 1099 forms to your employees and contractors. W-2 forms for employees are usually relatively straightforward, but preparing 1099s can be a more complex process with several potential pitfalls.
The 1099 form is used to report payments that your organization made to others for nonemployee compensation, rents, royalties, prizes and awards, attorney fees, and other services. Last year, the IRS split the 1099 into two separate forms: Form 1099-NEC (for nonemployee compensation) and Form 1099-MISC (for other miscellaneous payments). This change continues for the 2021 tax year.
Form 1099-NEC
The 2021 Form 1099-NEC must be issued to the recipient and filed with the IRS no later than January 31, 2022.
Nonemployee compensation of $600 or more should be reported on Form 1099-NEC. This includes fees, commissions, and other forms of compensation for services performed for your organization by a nonemployee. There are four conditions that require reporting nonemployee compensation on Form 1099-NEC. If all four of these conditions are met, your organization should file a Form 1099-NEC for the individual or entity that you paid:
The payee is not an employee of your organization.
The payee was paid for services rendered to your organization.
The payee is not classified as a corporation for federal tax purposes. (Most payments to corporations are exempt from 1099 reporting. However, there are some big exceptions, such as attorney’s fees. When in doubt, ask your accountant.)
The payee was paid a total of $600 or more throughout the year. (If you paid them less than $600 total between January 1 – December 31, you are generally not required to file a Form 1099-NEC.)
Form 1099-MISC
The 2021 Form 1099-MISC must be issued to the recipient by January 31, 2022. The IRS electronic filing deadline is March 31, 2022 (or February 28, 2022 if you’re filing on paper).
Miscellaneous service payments other than nonemployee compensation should be reported on Form 1099-MISC. This includes:
Payments of $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest
Payments of $600 or more in:
Rents
Prizes and awards
Other income payments
Cash paid from a notional principal contract to an individual, partnership, or estate
Fishing boat proceeds
Certain medical and health care payments
Crop insurance proceeds
Gross proceeds paid to an attorney (such as settlement agreements). Note: payments for the attorney’s services should be reported on Form 1099-NEC, not Form 1099-MISC.
Section 409A deferrals
Nonqualified deferred compensation
There are many exceptions and qualifications for issuing 1099s, and we recommend consulting with your accountant or reading through the full IRS instructions for 2021 1099-MISC and 1099-NEC forms.
Before you being preparing your 1099s, review your vendor records to make sure you have a current W-9 on file for all independent contractors and service providers as well as any entities that might fall under Form 1099-MISC reporting obligations. The Form W-9 is a simple IRS form used to confirm a payee’s tax information. Without a W-9, you’ll have difficulty preparing your year-end 1099 forms. To set your organization up for success – and to ensure smooth sailing during 1099 filing season – we always recommend obtaining your vendor’s W-9 before engaging in services or issuing payments.
