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Client Update: Nonemployee Compensation, Backup Withholding

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Most business owners should know they need to withhold employment taxes (social security, Medicare, and income taxes) from their employees’ wages and report those wages and the taxes withheld to the IRS. But what do they know about their reporting obligations for workers who aren’t employees? [IRS Tax Tip 2022-109].

Reporting nonemployee compensation.  While a business isn’t responsible for withholding employment taxes from nonemployee (or independent contractor) compensation, a business that pays more than $600 to an independent contractor must report that compensation to the IRS. Independent contractor payments are reported on Form 1099-NEC, Nonemployee Compensation.

Generally, businesses reporting contractor compensation must file Form 1099-NEC by January 31 of the year following the payment(s). See Instructions for Forms 1099-MISC and 1099-NEC.

Note. January 31 is a hard deadline. Unlike other information returns, there is no automatic 30-day extension to file Form 1099-NEC. And while an extension to file may be available under certain hardship conditions, such an extension must be requested before the filing deadline. Form 8809, Application for Extension of Time to File Information Returns, is used to request an extension of time to file Form 1099-NEC.

Backup withholding. In certain situations, independent contractor compensation that is reportable on Form 1099-NEC is subject to backup withholding. Backup withholding ensures that the IRS receives the tax due on certain nonwage income. When backup withholding is required, the withholding rate is 24%.

Independent contractor compensation is subject to backup withholding if:

  • a payee hasn’t provided the business with their Taxpayer Identification Number (TIN) or
  • the payee provided a TIN, but the IRS has notified the business that the payee’s TIN doesn’t match their name.

What is a TIN? A payee’s TIN is one of the following numbers:

  • Social Security (SSN)
  • Employer identification (EIN)
  • Individual taxpayer identification (ITIN)
  • Adoption taxpayer identification (ATIN)

 

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