The IRS requires 1099s to make sure they are aware of all the work taxpayers are doing. While employers give employees W-2s, independent contractors receive 1099s. These documents allow the IRS to match up income and ensure they are collecting all the taxes owed to the government.
Nonprofits must give 1099s to any company that is not a corporation and the nonprofit pays at least $600 during the year. Some examples of Independent Contractors are lawyers and law offices, bookkeepers, consultants, photographers, videographers, auctioneers and more.
This is important to understand. In general, the IRS says “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” The factors are behavioral control, financial control,service provided and type of relationship of worker with the nonprofit. Many nonprofits choose to pay their staff as Independent Contractors when the IRS may not label them as an Independent Contractor. Independent Contractors are often self employed, unless it’s a law firm. Independent Contractors have a business that is registered with the state you live in. Independent Contractors pay their own taxes. They can be a sole proprietor, but they are still a business. This means that who the independent contractor is sets the where they work, the hours they work, what equipment they use and more. They often have a contract with the nonprofit.
If the nonprofit sets the hours, work days, requires they use their computers or office, provides resources, etc. then they should be a W-2 employee and you pay their taxes as an employee.
IRS form SS8 gives information on determining whether the person is an employee or employer.
If the nonprofit mis-classifies the worker, there are consequences in payments of taxes for that worker and possible penalties.
What You Need
The Independent Contractor needs to give you a W-9 with their Employer Identification Number (EIN) or Social Security Number (SSN) if they are a sole proprietor and their name, address and type of business as registered. They should give you this information annually because if they moved or had a personal or business name change. Even if they don’t have changes, the form verifies information that is up to date for your records. If they refuse to give you a W-9 and you still want to work with this Independent Contractor, you will need to withhold 24% of their pay and send the 24% amount to the IRS to cover taxes for that Independent Contractor. If they don’t give you a W-9, you probably don’t want to work with them because the business may be suspect.
The 1099 Misc are due to the Independent Contract by January 31, 2020 if you are filling in Box 7 on the form, which is the majority of the filings. If you file multiple forms with a 1096, other line items on 1099 or other 1099s the filing date can be extended to February 29, 2020.
There are penalties for not filing a 1099 including $530 per 1099 not filed. If the form is not filed incorrectly and is not corrected within 30 days there is another $50 penalty and $100 if they form is not corrected by August.
Electronic filing is a great option for convenience and efficiency and is less expensive than sending in the paper forms.
NOTE: Linda is not an accountant or an attorney. Information provided can be verified with a CPA or tax attorney.