Here in our Chicago South Loop Tax Preparation office and our Homewood Il Tax Preparation office, we work with business owners and real estate investors looking to reduce the amount of Federal & state income taxes they’re required to pay. One of the ways we help our clients is to ensure that they deduct all of their expenses, and a major expense for many business owners is the amount paid to independent contractors.
Whenever a business owner or real estate investor uses the services of an independent contractor, the IRS requires that once payments exceed $600, a 1099-NEC must be issued. Although most people know this requirement as a hard and fast rule, there are a few exceptions to the rules (as with most things related to taxation). Keep reading to find out the exceptions.
Tip #1: Choose Contractors That Operate as Corporations
Your business does not have to report payments made to corporations, including S corporations, on Form 1099-NEC (unless the corporation collects attorney fees or payments for health and medical services). This rule also applies to LLCs that elect corporate status for federal tax purposes. If all your independent contractors are corporations or LLCs taxed as corporations for federal tax purposes, you have no 1099 filing requirements. Period!
Tip #2: Make Payments by Credit Card or Third-Party Payment Networks
Don’t report payments made via credit card and/or other third-party platforms such as PayPal on a Form 1099-NEC form. Credit card companies and third-party networks report these payments to the contractors on a Form 1099-K.
Tip #3: Always Get a W-9 Up Front Before Making Any Payments to the contractor
By getting the W-9 upfront before you make a payment to the independent contractor, you guarantee several things:
*** You know whether you have a 1099 filing requirement for the independent contractor because he, she, or it discloses the business type to you.
*** You know whether an LLC is classified as a corporation for federal tax purposes and, therefore, excluded from 1099 reporting.
*** You won’t have to chase the contractor down next year for the required information if you have to file a 1099.
Once you’ve paid the contractor, your leverage for the 1099 information is gone, and the contractor might not give you the information you need (we see this happen all of the time). If you need to issue 1099-NECs for contractors you paid in 2023 or earlier years, we can assist. Click this link to get started on filing 1099-NEC’s for contractors you’ve paid.
Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.
Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.
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