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Businesses Must Report Nonemployee Compensation and Backup Withholding

By January 5, 2022No Comments

Companies regularly report the money that they pay to their standard employees to the IRS. They not only have to take taxes out of those workers’ paychecks, but they also pay the business’ fair share of those taxes as well. What about nonemployees? These are workers who are subcontracted by the company to do a specific job or those who take on specific gigs using an app or sell items on a certain platform. The IRS has been carefully watching these forms of income and insist that companies, regardless of how those nonemployees earn money from the business, need to provide a yearly report on their total compensation, as well as any backup withholding that the company held back from the nonemployee.

Changes to the Tax Code

Recently, the IRS has made some changes to the tax code that go into effect this year. That means that companies need to be prepared now, so they can provide their nonemployees with the correct forms by January 31, 2022, which is viewed as the deadline for giving them such forms.

Previously, businesses that paid nonemployees to work for them could report those wages on Form 1099-MISC. However, starting this year (for the tax returns that will be filed in 2022), companies need to report this nonemployee compensation on a Form 1099-NEC, which is the same form used to report wages paid to an independent contractor who works occasionally for the business. By making this change, companies that previously did not send out 1099 forms to their nonemployees now have to do so, and even subject that income to backup withholding, depending on the circumstances.

Who Does the IRS View as a Nonemployee?

Unlike traditional employees who receive a W2 at the end of the calendar year, a nonemployee is quite different. The IRS loosely defines a nonemployee as someone who does not have taxes taken out of their paychecks. They are independent contractors who instead of receiving a W2, get a 1099 at the end of the year. However, thanks to the rising gig economy, this nonemployee status has been changed to include a few additional groups of people as well, due to the newfound possibility of making money through a series of apps and services.

In the past, if a contracted employee worked a few jobs on a construction site, they would receive a salary without taxes taken out and a 1099 reporting how much they made. Now, that worker still counts as a nonemployee, but there are others who do as well. For example, someone who buys lightly used goods and flips them online, using the apps Poshmark and Mercari, is considered to be a nonemployee of those sites. If that seller makes more than $600 each year in sales, they will receive a 1099 and the company needs to report their income to the IRS.

The same is true in numerous other circumstances, such as those who make money through a multi-level marketing company like Tupperware or Avon, and people who pick up gigs and deliveries through Task Rabbit, Uber, DoorDash, and Instacart. Those businesses should be tracking their nonemployees’ sales and income in order to give them a 1099 at the end of the calendar year. Their income and sales amounts also need to be reported to the IRS, or the company could get into trouble.

Does Every Nonemployee Need to Have Their Compensation Reported?

While it’s a good idea for companies to track all of the money that their nonemployees receive for proper accounting purposes, only those who make over a certain amount in a calendar year need to receive a 1099 and have the business send their information to the IRS. That amount is $600. This means that if someone makes $600 or more selling items on Mercari or has received that amount in compensation for delivering meals through DoorDash or meals through Instacart, then they have to receive a 1099. In addition, the company needs to inform the IRS of this compensation.

How Do Employers Report Nonemployee Compensation?

The 1099 form that was previously mentioned is the method by which the IRS wants this nonemployee compensation reported. The official title of the form is 1099-NEC, which stands for Nonemployee Compensation. One copy of this form goes to the worker, while the company keeps another, and the IRS receives a third. This form must be received by the IRS by January 31st each year. If the company needs a hardship extension, they can apply for one. However, the standard 30-day extension does not apply.

Four General Requirements

For companies wondering if their nonemployees need to be sent a 1099-NEC, there are four requirements that need to be met. They are:

  • The Person is a Nonemployee – Workers who are considered to be employees receive a regular salary and have taxes properly taken out of their paychecks. These workers receive a W2 once the calendar year has been completed. Anyone who does not receive a regular salary, yet received monetary compensation from a business is considered to be a nonemployee. Despite this non-employee status, the company should still have tax information on the person, such as their social security number.
  • The Money is Paid as a Result of Work Done or Services Rendered – Nonemployees who receive money from a business after completing a particular task or providing specific services are qualified to receive a 1099-NEC. These services can vary, and include things like listing and shipping clothing and accessories on Poshmark, providing people rides on demand through Uber, and providing shopping and delivery services through Instacart. Of course, there are many other jobs and services that fall within this category, such as freelance writing and graphic design, construction and home improvement jobs, and more.
  • The Person or Persons Receiving the Money Fall into One of Three Categories – While in most cases, the person receiving the funds from a business or through a business is, in the eyes of the IRS, an individual, there are two other groups that can qualify for a 1099-NEC as well. These are partnerships and trusts. A partnership is a legal business entity where the partners each report their own income earned through the company. Trusts are legal entities as well, and are governed by a number of different regulations, depending on how the trust is set up. All three are able to receive a 1099-NEC from a business, as long as the other requirements are met.
  • The Amount Paid is $600 or More – One thing that hasn’t changed about these regulations is the amount. In the past, if a nonemployee (such as someone who earned an amount through sales in a multi-level marketing company) earned $600 or more, it was reported on a 1099-MISC. Now, that same amount needs to be submitted to the IRS and sent to the nonemployee on a 1099-NEC.

Backup Withholding

If the company has not received a taxpayer identification number from the nonemployee, then they may be subject to backup withholding. The IRS defines a taxpayer identification number as a social security number, an employer identification number, an individual identification number, or an adoption identification number. All four of them are acceptable on a 1099.

However, not having one of those numbers makes the nonemployee subject to backup withholding. This means that a percentage of the money earned by that nonemployee needs to be held back by the company to ensure that the person can pay the amount of taxes that they owe to the IRS. While some payment may not be subjected to backup withholding, a number of them are. It all depends on the circumstances. Currently, the backup withholding percentage is 24%, which means that the company must hold back close to a quarter of what that nonemployee makes until the business receives that person’s taxpayer identification number.

Receiving Help With 1099 Forms

Sometimes, changes to the tax code can make things complicated for businesses. If your company needs to submit 1099-NEC forms for nonemployees, and you are feeling overwhelmed or unsure about how to proceed, it’s best to seek professional guidance. Some businesses, especially those who have a large number of app users who sell goods or pick up gigs, might have hundreds or thousands of these forms to submit. If this is the case, or you have any general questions about this change to nonemployee income reporting, it’s important to ask for expert help.

Contact Us for Assistance

If you have questions about reporting nonemployee compensation and backup withholding, or are unsure if your company needs to submit this information to the IRS, please reach out to us. The tax advisors at the Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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