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non-employee compensation

7 IRS Tax Tips for Businesses in 2022

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The IRS Newsroom has a section of their website dedicated to IRS Tax Tips, and we’ve compiled the best ones from 2022 related to business taxes. Non-employee Compensation & Backup Withholding In an IRS Tax Tip from July 2022, the agency reminds businesses that if they hire independent contractors, they aren’t responsible for withholding the employer portion of income, Social Security, or Medicare taxes. But any compensation equal to or more than $600 paid to these non-employees must be reported on Form 1099-NEC. In order to file this information return, you must know the nonemployee’s TIN, which can be one of the following numbers: Social Security Number (SSN), Employer Identification Number (EIN), individual taxpayer identification, or adoption taxpayer identification. Because of this nonemployee relationship to the business, these businesses are sometimes stuck in situations where the payer (your business) is required to withhold taxes from payments known as backup withholding (the current rate is 24%). Business Taxes & Travel Deductions Another July post from the IRS tax tips page talks about the importance of knowing what business travel expenses are tax deductible. Generally, these travel expenses must be “ordinary and necessary.” For example, it would be considered tax-deductible to stay in a regular hotel room for an industry conference but booking a penthouse suite or other luxury room will not be. Travel tickets and fares – Uber, train rides, plane tickets, and the like – are deductible. Lodging, business calls, and even laundry or dry cleaning are included, and these deductions aren’t just reserved for corporate employees – self-employed individuals can take advantage as well! For a more thorough list of the deductions, check out this IRS article. And for a bonus explanation about enhanced business meal deductions, check out this article. Spear Phishing Threats Some of our favorite IRS tax tips come in the form of …

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Does Working from Home Change Your Taxes?

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The coronavirus pandemic has created a major shift to freelance and remote work. But what does that mean for your taxes? Freelancing Boom As 2020 wore on, many businesses were forced to let employees go or close altogether in an effort to save themselves from massive losses caused by COVID-19 shutdowns. Two million people in the U.S. have taken up freelancing in the last twelve months, increasing that proportion of the workforce from 28% (where it had hovered steadily for nearly 5 years) to 36%, according to NPR. Freelancing and Taxes As more people head towards freelancing and independent contracting, individuals and businesses who make use of these new avenues and hire them for gigs of all sizes, the amount of 1099 filing, specifically 1099-NEC and 1099-MISC, will increase, too. Rather than send W-2s as you would with an employee, businesses that hire independent contractors will need to prepare a 1099-NEC to report non-employee compensation that totals more than $600 in a year, which includes but is not limited to the wages you are paying the non-employee. Self-Employed vs. Working from Home Employees who are now working from home may feel entitled to tax deductions for the expenses they incur as a result of using their own resources (utilities, office supplies, electronics) to compensate for their loss of office or workspace. But when it comes to taxes, there’s a difference between being self-employed and simply working from home for a larger company. If you are self-employed, running your own business from the comfort of your home, you are and have always been able to deduct home office expenses. Unfortunately, this is not the case for those who work from home and do not own their own business. Does that mean employees are on their own in purchasing the things they need for their new home office? Not necessarily. Employees are encouraged to ask their bosses for stipends to purchase items for their home office. In some cases, employers are …

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6 Common 1099 Questions

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As the trend towards freelance work continues to grow, more and more people will have to file form 1099, specifically 1099-NEC. Tax filing season will be here before you know it, and we wanted to share 6 common 1099 questions that businesses and individuals alike are asking. What is the deadline for filing 1099s? The deadline for filing 1099s with the IRS and for sending them to the independent contractor recipient is January 31 every year. However, for tax year 2020, the deadline is February 1, because January 31 falls on a Sunday. What happens if there are errors on my 1099? The most common errors associated with 1099 filing are: filing the wrong form type, reporting the wrong amount, reporting the wrong TIN or not including one at all, using the wrong year/version of the form, and not using the correct IRS form (you cannot download or copy). We’ve shared some tips here on how to fix your errors and file a correction. What are the different types of 1099s and what are they used for? There are 18 different 1099 forms: 1099-A, 1099-B, 1099-C, 1099-CAP, 1099-DIV, 1099-G, 1099-H, 1099-INT, 1099-K, 1099-LTC, 1099-MISC, 1099-NEC, 1099-OID, 1099-PATR, 1099-Q, 1099-R, 1099-SA, and 1099-SB. 1099-NEC and 1099-MISC are two of the most common 1099s. For more information on what the other 1099 forms are used for, check out our blog post on that topic. What’s the difference between 1099-NEC and 1099-MISC? The 1099-MISC is for reporting miscellaneous payments made to independent contractors for things like rent, fishing boat proceeds, royalties, substitute payments, medical/healthcare payments, crop insurance proceeds, gross proceeds paid to a lawyer, and any excess golden parachute payments. It was previously used to report non-employee compensation and wages. Non-employee compensation reporting is now done on the renewed 1099-NEC form – this was reintroduced to separate non-employee expenses and prevent common reporting mistakes. You’ll use a 1099-NEC to …

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Freelance Boom: What Your Business Should Know About Freelance Work and Taxes

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36% of freelancers do so full time – this is an 8% increase from 2019. How does hiring more freelancers affect your taxes? The freelancing industry in the U.S. is now a $1.2 trillion economy. This was a rising trend before the coronavirus pandemic hit, but now that it’s here and sticking around for a while, the push towards freelance and remote work has accelerated even more. Do you work with freelancers currently? Are you considering working with freelancers at an increased rate or for the first time this year? If the answer is yes, your tax filing process will likely be changing this year. Freelancers, when filing their own taxes, are often taught to think of themselves as their own business. But what does that mean for your business’s taxes when you hire them? The addition of the form 1099-NEC has changed the way businesses that hire freelancers and independent contractors will report those payments in the tax year 2020. Let’s go through some common changes and misunderstandings. What is a Freelancer or Independent Contractor? Your employees, freelancers, independent contractors – they all work for you, so why aren’t they all treated the same from a tax filing perspective? The big difference is in the relationship to your business. Employees (whether full- or part-time) have their income taxes withheld or matched by their employer: independent contractors and freelancers, since they are considered a separate entity, must set that money aside themselves. The hiring company or business does not do that for them. Freelancers also often set their own hours, use tools they purchased or acquired themselves, complete their work in whatever way they prefer, and they can also refuse work. Full employees are not able to do these things without approval from your business managers or supervisors. Do you need help filing as a freelancer or independent contractor? Check out this blog post instead. What Tax Forms Are Needed? At the end of the year, …

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IRS Publication 1220 and How It Affects Your 1099 Filing

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The IRS released Publication 1220, which says the 1099-NEC will not be included in the IRS 1099 Combined Federal/State Filing Program. Publication 1220 from the IRS is a recent and detailed announcement about the “Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921. 3922, 5498, and W-2G”. While you may not wish to read the full, 162-page PDF, some important new information has been shared about how to file the new form 1099-NEC. Publication 1220 “helps employers and tax professionals understand the specifications for filing certain information forms electronically with the IRS, including the requirements under the Combined Federal/State Filing Program (CF/SF),” as reported in this Forbes article. Federal and State Filing of 1099-NEC For 2020, the CF/SF Program has a list of which 1099 and other forms can be filed electronically. A key part of this program is the ability for these federal returns to be forwarded automatically to participating states, simplifying and streamlining the federal and state filing process. According to Publication 1220, however, the 1099-NEC is not among the approved forms. This means it’s on the individual business to make sure these forms are submitted to the state by the January 31 (or in 2021’s case, February 1) deadline.  Past Payments Still Need to be Filed Under Form 1099-MISC In the past, those who filed the 1099-MISC were able to take advantage of the CF/SF Program. With that in mind, any non-employee compensation you report that took place prior to the tax year 2020 – say, if you forgot to report a 2019 payment or compensation – will need to still be reported on a 1099-MISC, which is a part of the CF/SF Program. 1099-NEC Filing Extension Another new change for the tax year 2020 is the process for requesting a filing extension on these forms. Publication 1220 says “a request for an extension of time to file can be submitted on paper form 8809.” Filing this paper form is simply a request for a …

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Exceptions to the 1099-NEC

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There are 11 exceptions listed by the IRS that are not to be filed using 1099-NEC. The renewed 1099-NEC and accompanying 1099-MISC form changes may make your 2020 tax year filing a bit different than past years. We’ve discussed the dos and don’ts of filing the 1099-NEC as well as federal and state filing, and now let’s talk about some of the exceptions to the 1099-NEC, according to the IRS. Some payments, payouts, and compensation will not be reported on the 1099-NEC. Payment Exceptions to 1099-NEC Though many payments like contract work, fees paid to attorneys, and other payments and merchandise transactions between two professionals are recorded on the 1099-NEC, there are quite a few exceptions. Payment exceptions include: Payments for merchandise, telegrams, telephone, freight, storage and similar items  Rent payments to property managers and/or real estate agents. Note: these rent payments must, however, be reported on the 1099-MISC by the agent or manager. Payments to a tax-exempt organization, which also includes tax-exempt trusts: IRAs, HSAs, Archer MSAs, Coverdell ESAs, and ABLE (529A) accounts.  Any payments made to or for homeowners from the HFA Hardest Hit Fund or similar state programs. Compensation Exceptions to 1099-NEC 1099-NEC exceptions also include some forms of compensation. Per the IRS, there are 1099-NEC exceptions for “compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor's benefit, or under a state program that provides benefits for surviving dependents of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty.” Compensation for wrongful incarceration (regardless of criminal offense) which ended in a conviction under federal or state law are also exempt from form 1099-NEC filing. Wage Exceptions to 1099-NEC Wages paid to employees are another exception to form 1099-NEC, …

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