Most often taxpayers receive a 1099-NEC for contract work they did for a company. However, taxpayers with a business, self- employment, or rental property may actually be required to issue a 1099-NEC form themselves under certain circumstances. Military families often have some side income or rental property and if this is the case for you it is important to understand the basic filing requirements. Disclaimer: This discussion does not cover every scenario for reporting income or spending, nor every scenario which requires a 1099-NEC. And we are not discussing when a 1099-MISC is required. Do not rely on just this article to determine your filing requirements, but also reference IRS instructions and publications and the tax code.
Please don’t stop reading until the end, or you may leave with the wrong conclusion.
We start with the basic requirement. You have to issue a 1099-NEC, if in the course of your business (including rental property) for each person you pay during the tax year $600 or more total:
- For services (including parts and materials) performed by someone who is not your employee, or
- For payments to an attorney.
Generally for someone with a schedule C or a schedule E in their tax return (self employment, sole proprietorship, and rental properties) the most common reason to have a filing requirement for the 1099-NEC is due to paying an individual contractor to perform some services. There is NO 1099-NEC requirement when paying individuals for personal services, there is only a requirement in association with business or rental property activity. For example, if you hire someone to paint your primary residence (and is used solely as your primary residence), you don’t have to issue them a 1099-NEC. Although please note that if you have household employees, you may have other reporting requirements including possibly a W-2 form.
With the basic requirements provided above one would think that many folks have a 1099-NEC reporting requirement. Plenty of folks do, but not as many as you might think. These are because of exceptions and these are the most commonly applied ones for the folks we are talking about:
- You don’t have to file a 1099-NEC if you paid with a credit card, a payment card, or through third party payment network transactions. Therefore with many of the payment methods used today, there isn’t a requirement to file a 1099-NEC.
- Payments to a corporation are an exception. These include LLCs (Limited Liability Companies) that are taxed as S corporations or C corporations. The barrier to relying on this exception is how many folks think to ask an LLC how they are taxed? But that is the exception, so if you are going to use this specific exception ensure that you are correct. You can ensure you know the business status and thus whether or not you need to file a 1099-NEC by getting the business entity to fill out form W-9 when you engage them for services.
- Payments of rent to real estate agents or property managers are exceptions.
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items are also exceptions.
If you think you may have to issue a 1099-NEC, then make sure you get a W-9 from the person or entity which you have hired when you first engage them.
I suspect some taxpayers, due to the principle of “you don’t know what you don’t know” have answered this question which is from the schedule E and schedule C incorrectly: Did you make any payments in 20XX that would require you to file Form(s) 1099?
I hope this article will help you determine how to answer that question accurately. Again, we have covered the common scenarios for businesses and rental property owners regarding 1099-NEC reporting and exceptions, but not all. For a more comprehensive look you can find more information on IRS.gov. If it isn’t clear that one the exceptions above apply and if you aren’t sure when to take a more detailed look then consider whether or not the payment could be construed as taxable income to the recipient and it would not otherwise be reported to the IRS. That is the purpose of this income reporting, to make sure taxable income is reported and taxed when required.