Here’s a rundown on the various ways Form 1099-NEC impacts businesses and their compliance ops.
Embracing change can be a challenging task.
If you’re a business that’s just opening up to new reforms, such as implementing a new tax form into your tax regime or a new methodology to speed up the TIN matching process; it can be all be very overwhelming.
This is usually because your internal teams are used to a certain way of establishing compliance, and new changes mean being accustomed to new practices and even a new mindset.
While there is nothing life-changing about these tax regimes from a layman’s viewpoint. Your accounting and compliance teams already understand the severity of this wave of change. In the context of tax compliance, implementing Form 1099-NEC reporting is a pretty big deal.
Not just because of the fact that it’s a new form introduced to substitute Box 7 of Form 1099-MISC, a significant segment at that. But because Form 1099-NEC has been introduced to streamline certain business processes and improve the transparency of the relationship between an entity and its contractor.
The following will discuss in detail such narratives that outline the role of Form 1099-NEC in compliance.
So, let’s get to it.
What Is Form 1099-NEC?
Form 1099-NEC is an information return in the 1099 form series. It specifically deals with non-employee compensations paid to independent contractors. Businesses hire independent contractors all the time and pay them for their services. A freelance blogger, digital creator, or logo designer, are all examples of freelancers and independent contractors.
And if you hire one and pay $600 or more in the course of business, then the IRS requires you to report such non-employee payments made in a tax year in Form 1099-NEC.
The keyword here is “non-employee” because employee compensations, such as salaries, wages, tips, unemployment, and other benefits are not paid to independent contractors.
Why Is Form 1099-NEC Used?
Form 1099-NEC was reinstated for the fundamental purpose of accelerating the accuracy of reporting in non-employee and employee payments.
Businesses from the healthcare, transport, and other industries have been reporting the payments made to their employees as independent contractors, essentially misclassifying the employees, and holding off certain employment benefits, such as insurance and unemployment.
In order to address the malpractice of employee misclassification and improve the reporting accuracy as a part of the voluntary compliance program, the IRS re-introduced Form 1099-NEC. This form substitutes Box 7 of Form 1099-MISC, which previously reported the payments made to independent contractors.
This change brings clarity to the non-employee compensation reporting and allows the businesses to adapt to the new practice by vetting the independent contractors prior to hiring.
How Implementing Form 1099-NEC Impacts Businesses
Right from improving reporting accuracy to streamlining the vendor onboarding process, Form 1099-NEC reporting, when implemented, essentially helps businesses in four major spheres as follows.
Streamlining Vendor Onboarding Process
When hiring an independent contractor, the business or the employer has to vet the incoming profile for legal, business, and tax compliance to prevent unpleasant non-compliance scenarios in the long run.
Form 1099-NEC reporting requires the payer (the business) to report the payee’s (contractor’s) taxpayer identification number and legal name along with the transactional information. This means businesses are required to obtain this information and validate the accuracy of the details right from the get-go to prevent TIN discrepancies with the IRS.
And what’s more? When an entity has to hire a number of independent contractors, validating the TIN and legal name is a must, which expands the KYC compliance practice, essentially streamlining the vendor onboarding process.
Improving Employer-Contractor Transparency
When businesses want to hire an independent contractor, Form W-9 is sent to the contractor by mail or via email. This must be filled out by the contractor/payee with accuracy. This is a critical instrument detrimental to the TIN and legal name obtainment. W-9 solicitation is a practice on its own to test the reliability of a potential independent contractor you plan on hiring for a pre-defined term.
At this stage of the onboarding process, both parties can discuss and lay down their set of terms and conditions, if not done already. And the successive TIN match practice allows the employer to validate the accuracy of the details and even further screen the profile for other potential risks through KYB and KYC checks. Note that incorrect TIN reporting will result in TIN discrepancy penalties from the IRS.
It’s established that Form 1099-NEC must be filed by the payer to the IRS. However, another important element in this is that the payer must send a copy of Form 1099-NEC to the payee first. After the payee reviews and agrees with the information specified in the forms, the payer can submit a copy of the approved return to the IRS for review.
The practice of report validation ensures that there are no errors in reporting from the payer’s end. Further, it also allows the payee to report their payments and income more accurately when reporting their income information.
Additionally, this practice of mutual consensus allows the independent contractor and the employer to work in a harmony, building an ecosystem of trust and reliability.
Accelerating Reporting Accuracy For Vendor Payments
Form 1099-NEC reporting requires the employer to report not just the vendor payments made but also the tax withholdings and state tax withholdings. Employers may come across a variety of independent contractors, such as self-employed individuals, tax-exempt organizations, and other entity types. The tax withholding structure will change for each of these profiles and the same must be recorded and reported accurately.
The IRS states that Form 1099-NEC must be filed for each of the independent contractors to whom you’ve made a payment of $600 or more. This means you have to create a master sheet for every independent contractor you plan on hiring and record all the information pertaining to the vendor payments in a comprehensive manner, such as the legal name, TIN, particulars, amount transacted, tax withholdings, date of transaction, and more.
Form 1099-NEC enables businesses to report the payments made to independent contractors accurately and allows both parties to work in a mutually-agreed business arrangement. Implementing and embracing the perks of Form 1099-NEC is not only mandatory but allows the business ecosystem to work smoothly through the changing dynamics of the economy.
If you’re a business owner who works with independent contractors regularly, you must be familiar with the reporting practices of Form 1099-NEC already. What you may not have explored yet is the ease of vendor compliance that can be established with bulk 1099-NEC filing.
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