IRS Reminds Businesses About Nonemployee Compensation and Backup Withholding

Most times, businesses pay their employees for the work they do, and set aside a portion of those wages to in turn, pay Uncle Sam. But what if the business has to pay someone who isn’t technically an employee?

Enter nonemployee compensation.

Form 1099-NEC, Nonemployee Compensation, is used to help collect taxes from those who get paid for services to a company or nonprofit organization while not being a full employee.

The law demands that anyone who earns $600 or more in nonemployee compensation in a year has to report the payments using Form 1099-NEC.

The deadline for filing Form 1099-NEC is Jan.31. For 2021 returns, there is no automatic 30-day extension of time to file. However, hardship cases may be able to qualify for an extension.

The IRS says a Form 1099-NEC has to be issued for each person that a business or nonprofit group paid for:

  • Services performed by someone who is not their employee (including parts and materials);
  • Cash payments for fish (or other aquatic life) they purchased from anyone engaged in the trade or business of catching fish; or
  • Payments to an attorney.

Some specific kinds of payments don’t have to be listed on the Form 1099-NEC. For a full list, see the Instructions for Forms 1099-MISC and 1099-NEC on the IRS website.

Backup Withholding

If a person due nonemployee compensation hasn’t supplied the payer with a Taxpayer Identification Number (TIN), or if the IRS says the payee’s TIN doesn’t match their records, backup withholding may be necessary.

A valid TIN can be a Social Security number; employer identification, individual taxpayer identification or adoption taxpayer identification.

Backup withholding may apply to most kinds of payments that are reported on Form W-2G and the various Forms 1099. It is defined as the taxpayer’s requirement to withhold a certain percentage of tax from income not otherwise subject to withholding.

The person or business paying the taxpayer doesn’t generally withhold taxes from some kind of payments, yet there are cases when the payer is required to withhold a percentage of tax due the IRS.

At present, the current backup withholding tax rate is 24%.

For more information see the Instructions for Forms 1099-MISC and 1099-NEC; the General Instructions for Certain Information Returns; or Publication 15, Employer’s Tax Guide (Circular E).

SourcesBusinesses must report nonemployee compensation and backup withholdingInstructions for Forms 1099-MISC and 1099-NEC.

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