Normally at this time of year, we would do a blog post about a wonderful holiday party. With Winter Storm Elliott impacting the country, we postponed that get-together. Instead, we thought to take a look at the changes in taxation reporting for the fiscal year 2022—through the light of the holiday season.
PNC Bank has, for almost 40 years, calculated the cost of giving all of the gifts featured in the famous song, “The Twelve Days of Christmas.” This year, it calculates out to $45,523.27—up 10.5% from last year.
Here’s the breakdown:
- Partridge in a Pear Tree = $280.18
- Turtledoves = $600.00
- French hens = $318.75
- Calling birds = $599.96
- Golden Rings = $1,245.00
- Geese A-Laying = $720.00
- Swans A-Swimming = $13,124.93
- Maids A-Milking = $58.00 (yes, that’s it; they make the federal minimum wage of $7.25/hour)
- Ladies Dancing = $8,308.12
- Lords A-Leaping = $13,980.00
- Pipers Piping = $3,021.40
- Drummers Drumming = $3.266.93
Now, how does this relate to 1099s? Simple. Assuming you hired each of these… Some require a 1099.
Form 1099-NEC is still here. Introduced in 2021, it allows employers to report non-employee compensation in the amount of $600 or more directly to the IRS. However, what is considered non-employee compensation? This is where it gets a little murky.
The primary use of the form is to report payments made to non-incorporated vendors: individuals, partnerships, LLPs, LLCs that are taxed as partnerships. Yes, this is one of the ways to gets complicated. You need to know the business entity structure you’re dealing with. It gets further complicated as some LLCs report as S-corporations for tax purposes. So If you rented the Turtledoves, Geese, and Swans from a company specializing in such things, you could conceivably need to issue them a 1099-NEC.
Adding to the confusion, these forms are also used for services such as subcontracted work, freelance work. We can assume that your Ladies, Lords, Piper and Drummers will all receive a 1099-NEC. The exception: 1099s cannot be used for employees or employee reimbursement—and the IRS is cracking down on abuse of the “independent contractor” versus “employee” role. Many small businesses try to skirt their responsibilities for tax withholding and benefits by calling their employees “subcontractors” and issuing 1099s. That habit can lead to nasty lawsuits and penalties by the IRS.
The 1099-NEC can be used for professional fees—as long as they are to non-incorporated vendors. Let’s say your Lords were members of the Screen Actors Guild, and paid dues based on their income. If they had enough income from events, they could potentially pay dues as high as $11,500. The Lords could then issue a 1099-NEC to SAG for dues paid.
And a 1099-NEC can be issued to an attorney to whom you paid fees of more than $600. Heaven forbid the Geese attacked the Milkmaids, and you had to protect yourself from a lawsuit. If you paid an attorney more than $600 to defend you, 1099-NEC… unless the payment was part of a settlement agreement, in which case they would be issued a 1099-MISC.
1099-NECs can also be used for parts and materials reporting. If you made direct sales to a buyer who intended to resell those items anywhere other than in a permanent establishment (for example, a vendor who works exclusively in craft fairs and home shows) of more than $5000, they would also need to be issued a form.
So what about the 1099-MISC? That’s the catchall for anything not listed above:
- Rent of more than $600.
- Royalties of more than $10.
- Prizes and awards of more than $600.
- Backup withholding or federal income tax in any amount.
- Fishing boat proceeds (thank Heavens we aren’t fishing in this song!)
- Crop insurance proceeds of more than $600
- Cash payments for the purchase of fish for resale in any amount (not sure why it’s just limited to fish, but I’m again happy we aren’t fishing in this song)
- Section 409A deferrals in any amount
- Excess golden parachute payments in any amount
- Nonqualified deferred compensation in any amount
- Reportable payments made to corporations in any amount
- Amounts paid to physicians, physicians’ corporations, or other suppliers of medical services, of more than $600
- Substitute dividends or tax-exempt interest payments in any amount if you are a broker
Now for the really small print: This also hinges on how you are paying people. The IRS requires third-party “Payment Settlement Entities”—such as Venmo, CashApp, Amazon, Paypal, Airbnb, Uber, Lyft, etc.—to issue a 1099-K to anyone who received more than $600 in goods or transactions during a year. So you paid Holiday Jewelry Vendor for the Golden Rings through Venmo, Venmo is required to send HJV a 1099-K for the amount they received. Now if you receive a 1099-K but the items/money received was for personal use instead of professional, you might not have to pay income tax on it, but you might still want to report it to prevent the IRS or the state flagging your return.
These are the most common situations for a 1099. There are also forms:
- 1099-INT (interest payments)
- 1099-DIV (dividends)
- 1099-R (retirement plan disbursements)
- 1098 (mortgage interest)
- 1099-A (release of a debt)
- 1099-B (sales of covered securities as a broker)
- 1099-C (forgiveness of a debt)
- 1099-S (sale of real estate)
- 8937 (very specific issuance of a security that impacts other securities held by others)
Overwhelming? It can be. So here are the best suggestions for issuing 1099s: engage a qualified tax professional; if you use QuickBooks Online, there is a new option that allows you to issue them directly through QBO; make sure that you have W-9s for every non-employee person to whom you pay money; check the IRS’ website; if you’re issuing 250 or more 1099s, you must file them with the IRS electronically; and when it doubt, send it out. Wishing you all a wonderful holiday season, and easy filing!