What
is Non-employee Compensation?
1099-MISC non-employee compensation (NEC) applies to
the self-employed, independent contractors, and other service professionals who
earn their income outside the conventional employer-employee association. NEC
includes any payments related to compensation, fees, awards and prizes for
services performed as a non-employee for a business by an individual; other
forms of payment for services performed for your trade/business by non-employee;
and fish purchases for cash. Federal
executive agencies that provide compensation to vendors for services, including
payments to corporations, must report the payments as NEC. NEC is handled differently
than employee wages and so before paying and reporting the compensation to the
IRS, it must be determined whether a worker is an employee or an independent
contractor.
When you pay an independent contractor, you do not
withhold taxes from their payment because they are not on your payroll and as a
result, you don’t have to pay the employer portion of the Federal Insurance
Contributions Act (FICA) tax (made up of two separate taxes, Social Security
and Medicare) and the independent contractor pays the self-employment tax.
How
is the Non-Employee Compensation filing for IRS performed?
Non-Employee Compensation is filed with IRS through
the Form 1099-MISC in Box 7 and it is subject to self-employment tax. Any payment not subject to self-employment
tax and not reported elsewhere on Form 1099-MISC must be reported in Box 3 –
Other income.
Condition
for entering box 7 as non-employee compensation
Some of the rules for classifying the non-employee
compensation relates to any payment made to the recipients for $600 or more
during the year; an individual who is not a direct employee; an independent
contractor for the services in the course of your trade / business (including
government agencies and nonprofit organizations); an individual, estate, partnership,
or, in some cases, a corporation, etc.
Some
examples of payments reported in Box 7
Payments reported in Box 7 include Professional
service fees such as fees to attorneys, accountants, contractors, architects,
engineers, etc; Payment for services, including payment for parts or materials
used to perform the services; Payments by attorneys to witnesses or experts in
legal arbitration; Commissions paid to non-employee that are subject to
repayment but not repaid during the calendar year; Fees paid by one
professional to another, such as fee-division or any referral fees; Payments to
non-employee entertainers for services; Taxable fringe benefits for
non-employees; Fish purchases for cash; Gross oil and gas payments for a
working interest;
What
should not be reported in Box 7?
You should not report in Box 7 any payments related
to rent, royalties, other income not subject to self-employment tax, interest,
the cost of group-term life insurance paid on behalf of a former employee, Payments
made to deceased employee in wages paid in the year after death, Expenses reimbursement
paid to volunteers of non-profit organizations, Employee’s wages, travel allowance,
bonus, prizes, etc.
Due
date for 1099-MISC box 7
1099-MISC form with Box 7 should be filed by Jan 31
and the rest could be filed before March 31. Any e-Corrections can be done not
later than Aug 31.
1099
Extension
If your company needs more time to file your 1009s,
then you need to apply for an extension using Form 8809. There are two types of
extensions:
·
Extension for filing 1099 forms with the
IRS
·
Extension for delivering 1099 forms to
recipients
If you plan to file Form 1099-MISC reporting
non-employee compensation payments in Box 7, you must request an extension no
later than January 31.
Penalty
The penalty varies from $30 to $100 per form
($500,000 maximum per year), depending on the delays made by the company to
issue the form. For deliberate disregards to the requirements to provide a
correct recipient/payee statement, the company may be subjected to a minimum
penalty of $250 per statement with no maximum limit.
Independent contractors need to complete Form W-9,
Request for Taxpayer Identification Number, in order to fill out Form 1099-MISC
when they begin working for you. Form W-9 captures information related to the
contractor’s name, Taxpayer Identification Number (TIN), and address which is
needed to complete form 1099-MISC.
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