Is your nonprofit using 1099 best practices?
Nonprofits rely on the generosity of donors and volunteers to support their mission and achieve their goals. But, just like for-profit businesses, nonprofit organizations must also navigate complex tax laws and regulations to remain compliant. One of the key areas for nonprofit compliance is the correct use of 1099 forms.
You see, in most cases, many nonprofits don’t have the resources, capacity, or even the need to have full-time employees. It is expensive and untenable since you have to deal with costly taxes and contribute to social security, unemployment insurance, and other benefits. In such cases, hiring independent contractors and vendors is always a great option for most nonprofits. This is where form 1099 comes in.
Form 1099 is a miscellaneous IRS information form used to report the payments you make to vendors, independent contractors, freelancers, and other non-employees. Nonprofits must understand various 1099 rules and be able to properly file these forms each year with the IRS to remain compliant.
But what are the 1099 rules for nonprofits, and what are some best practices when it comes to filing these forms? Here’s a comprehensive guide on everything you need to know.
Form 1099 Rules for Nonprofits: What You Need To Know About 1099s
What is form 1099 MISC?
Form 1099 MISC is an IRS tax form used to report income that is not salary, wages, and tips. It includes payments made to independent contractors, such as freelancers, subcontractors, and other individuals or businesses providing services or goods to a nonprofit organization.
Unlike form W-2 which is used to report an employee’s wages, 1099s are used for nonemployees who are not on the payroll and who ideally are considered independent from the nonprofit.
By independent, it means that while the nonprofit organization may have control over the work to be performed, it doesn’t control how or when it is done.
A nonprofit is therefore not required to withhold income tax, social security, medicare taxes, or federal unemployment tax from payments made to 1099 contractors.
When are 1099s required?
Nonprofits must file 1099-MISC forms for any individuals or businesses that they paid at least $600 in a calendar year so the IRS can track this income. This includes payments made for services, rent (apart from rent paid to an agency), interest, dividends, and prizes or awards.
What’s the deadline for filing 1099s?
Since you are the one paying, you’ll need to provide form 1099-MISC (Copy B) to the vendor or independent contractor by January 31, and then file a copy of form 1099 (Copy A) with the IRS by February 28 (for paper forms) or March 31 (if filing electronically) and keep a copy (Copy C) for your records.
When sending the 1099s, you’ll also need to file form 1096 with the government showing a list of all the 1099s sent out each year.
But what happens if I’m late?
Well, late filing and intentional disregard for filing 1099s will result in penalties from the IRS.
Here are the penalties:
- If filed less than 30 days late, the penalty is $30
- If filed more than 30 days late and before August 1, the penalty is $60
- If filed after August 1, the penalty is $100
- The fine is $250 for intentional failure to file
These penalties can quickly add up, especially if you are filing more than one 1099 form, so it is important to get the forms completed and filed on time.
When do nonprofits need to issue 1099 forms?
You’ll need to issue a form 1099 if the following 4 conditions are met:
- You made a payment to someone who is not your employee for services rendered.
- The payment was at least $600 during the year.
- You made the payment to a partnership, individual, vendor, or estate
- The payment was made in the course of your trade or business where services were performed and not subject to backup withholding taxes. These services include parts and materials
What information is required on a 1099 form?
When you begin working with an independent contractor or a vendor, you need to provide them with a form W-9 which normally collects the necessary personal and tax withholding information that you’ll need to generate your 1099. Be sure to keep these W-9s safe, organized, and easily accessible.
When filing your 1099s, you have to pull together the following information from the W-9s provided:
- The contractor’s name
- Social security number (for sole proprietorships and individuals)
- An account number
- Type of payments made
- Total non-employee compensation
- Business entity name (if they are working as an LLC or corporation)
- Taxpayer identification number (TIN) for applicable business entities
When filing this information, you must ensure accuracy and provide all the necessary details or risk fines and penalties from the IRS if the information provided does not match what the contractor provides.
NOTE: If you don’t obtain an SSN or EIN before you pay the vendor or independent contractor, the IRS requires you to withhold 28% (backup withholding) from the payment and report it to IRS on a form Form 945 (Annual Return of Withheld Federal Income Tax).
Best Practices To Follow When Filing 1099s
To ensure that everything is filed on time and correctly, it’s important to follow the best practices for nonprofits when filing 1099s.
Here are some tips to keep in mind:
- Require all vendors to fill out form W-9 before doing business with them. You’ll use this information when filling out form 1099.
- Verify that the vendor or contractor has provided accurate tax identification information.
- Keep accurate records of payments made to vendors and contractors. This can be done by collecting invoices, receipts, and other documents which can be organized in a physical or digital filing system.
- Verify that you’ve paid more than $600 within that calendar year
- Review the vendors to determine if they qualify for form 1099
- Use an electronic filing system to ensure timely and accurate filing of 1099 forms. This avoids the need for mailing or printing and filing by hand.
- Provide vendors and contractors with their 1099 forms (Copy B) on time, as failing to do so will result in penalties from the IRS. Consider asking for their email addresses to speed up the process since you can file electronically and send out the forms via email.
- File your form 1099 (Copy A), ensuring that all required information is included on the forms
- File Form 1096, which summarizes all the 1099s sent out each year
- Always keep a record of copies of the 1099s (Copy C) that were sent to vendors and contractors. These will come in handy if the IRS ever asks for proof of filing or if there is any discrepancy.
- File on time and ensure the accuracy of the forms to avoid penalties.
- If you need to pay someone who is a 1099 vendor, it is advisable to pay via a debit card, credit card, or PayPal since the onus is on the card issuer or PayPal to issue the 1099 form.
What You Need To Do Now
- Review your potential 1099 vendors and contractors to see if they meet the criteria to receive a Form 1099.
- If yes, make sure you have accurate records of payments made to them and verify that their tax information is correct. You will also need to provide them with a Form W-9. Finally, when you file your taxes, make sure to include all Forms 1099 in your tax documents.
- Take the time to review and understand the 1099 requirements and process from start to finish. This will save you time and help you stay compliant with IRS regulations.
- If you need further assistance, please don’t hesitate to reach out to a nonprofit finance and accounting professional such as TheCharityCFO.
Work With Professionals For 1099 Best Practices
We understand that tax season can be complicated for nonprofits. With so many different forms and regulations to consider, and limited resources to do so, it can be overwhelming to stay on top of everything.
That’s why we at TheCharityCFO strive to make nonprofit tax returns as easy and straightforward as possible. We give expert bookkeeping and accounting support to help nonprofits just like yours take care of their tax returns and stay compliant with IRS regulations.
With over 150+ nonprofit clients, we have the knowledge and experience to help you make sense of your nonprofit’s tax situation. Contact us today to learn more about how we can help your nonprofit make tax season a breeze.
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