Reporting Requirements for Businesses That Make Payments for Nonemployee Compensation, to Attorneys, and for Rents
January 7, 2020
Any business that pays another individual or business at least $600 of nonemployee compensation, attorney/legal fees, and/or rents are required to have 1099-MISC forms prepared and furnished to both the payee and the IRS. In addition to corporations and partnerships, those who report business activity on Schedule C, Schedule E (rental activity), and Schedule F (farming) on Form 1040-U.S. Individual Income Tax Return are subjected to the reporting requirements.
Exceptions to this include:
- Payments made by credit cards are not required to be reported.
- Payments to an S-Corporation or a C-corporation.
Caution to Exception #2 above. Payments to attorneys must be reported regardless of the business entity type. For Limited Liability Companies (LLCs) it will depend whether they are taxed as a corporation, sole proprietor, or a partnership. Payments to an LLC as a sole proprietorship (a.k.a. single-member LLC) or a partnership mandate reporting. Rather than trying to ascertain what type of entity an LLC is, we recommend that your business obtain a W-9 from all LLCs that were paid $600 or more for nonemployee compensation, attorney fees, and/or rent. On the W-9, the payee will indicate what type it is. More information on the W-9 will be provided as we continue.
Also, another area of caution is that payments to nonprofit organizations and government agencies are also required to be reported.
Nonemployee Compensation (NEC)-Box 7 of 1099-MISC
What is Nonemployee Compensation (NEC)? NEC are payments that a business makes to an individual or business for payment of services. The individual or business is not employed by your business i.e. they do not receive W-2 wages from your business. Whether or not the individual should be considered your independent contractor or an employee is another subject matter that will not be addressed here. If you are interested in more information on the independent contractor versus employee issue, please contact someone at CPA.
Again, payments for services are subject to reporting requirements. If your business made payments to another individual or business that only included tangible goods, then there are no reporting requirements. It is possible that your business paid an individual or business for both services and goods. For those instances, we recommend you obtaining their W-9 information, and then seek the advice of a CPA.
Some common examples of payments for services include repairs and maintenance activities such as landscaping, equipment and building repairs, janitorial services, etc. Professional services such as accounting, legal, engineering, etc. may also be subject to reporting requirements. Reminder: Attorney payments, regardless of entity type, are reportable. An illustration: If you happen to pay our firm, Cunningham Powell, Alexander, A.C., for accounting services, you would not be required to file/issue a 1099 for payments to us. Why? Because we are a C-corporation. You may have not known that unless you requested a W-9 from us. Feel free to reach out to us for assistance on filing requirements if you have additional questions.
For 1099-MISC with NEC, forms must be both filed with the IRS and furnished to recipients by January 31, 2020.
Payments to Attorneys-Box 7 or Box 14 of 1099-MISC
As mentioned earlier, any payment of $600 or more to attorneys is reportable regardless what type of business entity they are. For those of you who are preparing your own 1099-MISC for payments to attorneys, please note that payments may be reported in Box 7 as nonemployee compensation or Box 14 as gross proceeds paid to attorneys. Please refer to the instructions for Form 1099-MISC regarding when to report in Box 7 or Box 14, or seek assistance from CPA. In general, payments for the attorney’s services (billable time) goes in Box 7. Payments to attorneys for claims and settlements go in Box 14. The filing deadline for payments to attorneys is dependent on which box the payments are reported. If reported in Box 7, the forms need to be filed with the IRS and furnished to recipients by January 31, 2020. If reported in Box 14, the forms need to be filed with the IRS by February 28, 2020, and furnished to recipients by February 18, 2020. The different February dates between furnishing the 1099-MISC to recipients and filing 1099-MISC with the IRS for Box 14 recipients is not a typo.
Rents-Box 1 of 1099-MISC
Rental payments of $600 or more to individuals or eligible businesses must be reported. Rental payments include real estate rentals and equipment rentals. With respect to real estate rentals, businesses that make payments directly to the property owner as opposed to payments through a real estate agent or property manager must be reported. If rent is paid to a real estate agent or a property manager, that real estate agent or property manager is required to file and furnish the 1099-MISC to the property owner. Payments for rents must be filed with the IRS by February 28, 2020, and furnished to recipients by January 31, 2020.
What Information is Needed to Correctly Prepare 1099-MISC?
An accurate individual name and/or business name, taxpayer identification number such as social security number (SSN) or employer identification number (EIN), type of business entity the individual or business is engaged in (sole proprietor, C corporation, partnership, etc.), and address. How should your business obtain this information? Your business should request the payee to complete Form W-9, Request for Taxpayer Identification Number and Certification, and return the form for you to keep on file and/or provide a copy to the CPA staff member assisting you in preparing the 1099-MISC. A copy of the W-9 has been attached for you to distribute to payees that may fall in the above categories. As opposed to waiting until it is time to prepare 1099s, your business should make it a practice to obtain these throughout the year. It is recommended that you obtain this information from the payees before you actually accept services and pay them.
What Does CPA Need from Your Business?
If our firm is to prepare the 1096 (Annual Summary and Transmittal of U.S. Information Returns that get filed with the 1099-MISC) and 1099-MISC forms for your business, we recommend that you identify any potential payees in which 1099-MISC may be required to be filed, and obtain the payee’s accurate filing information (address, tax identification number, etc.) by requesting for the payee to complete the attached W-9. Our firm is requesting that we have this information from your business before January 24, 2020, in order to ensure timely preparation before the January 31st deadline. Please note that the IRS may assess penalties for failure to file correct 1099s in a timely manner. The penalty varies from $50 to $270 per information return (per recipient/payee) depending on how late they are filed or not filed at all.