Form 1099 is a crucial tax document for nonprofits that engage independent contractors, vendors, or freelancers.
As a tax-exempt organization, you must issue a 1099 form when paying $600 or more for services rendered by non-employees during a calendar year. This requirement ensures compliance with IRS regulations and helps maintain accurate records for nonprofit tax filing.
While nonprofits work with employees, understanding the role of 1099 forms is essential for smooth operations and proper tax filing. In this blog, we explore the various types of 1099s, find out whether your nonprofit needs to file for taxes, and the consequences of non-compliance.
Do Nonprofits Get a 1099 Form?
Form 1099 of the Internal Revenue Service (IRS) is the miscellaneous income tax form to report non-employment income, separate from wages, tips, or salaries. Payers and payees in a tax-exempt organization must file Form 1099 to report non-employee compensation of $600 or more.
As a nonprofit organization, you are responsible for issuing Form 1099 to report payments made to independent contractors like:
- Vendors
- Contractors
- Freelancers (Businesses or individuals who are not your employees but have been hired for a specific job)
According to the IRS,
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.
You can often hire contractors for work that does not require full-time hiring. Nonprofits need to issue a Form 1099 to these payees, who will then report their non-employment payment details on their tax returns.
Why Must Nonprofit Organizations Issue Form 1099?
You will be required to issue a form 1099 for the following four conditions:
- You made a payment to individuals other than your employee.
- You paid any individual, partnership, vendor, or estate.
- You paid for services in the course of your nonprofit.
- You made payments of $600 and above in one calendar year.
When completing Form 1099, you must provide:
- Recipient's Name
- Recipient’s Social Security Number (SSN)
- Recipient’s Individual Taxpayer Identification Number (ITIN)
You will also furnish a copy of this form with the IRS. That’s why keeping accurate records of financial activities is necessary.
Track all the non-employment payments and ensure contractors receive their forms on time.
How Does A Nonprofit Issue Form 1099?
Nonprofit organizations must have top-notch accounting software and bookkeeping processes to issue Form 1099 correctly.
Track all your payments to vendors and other independent contractors precisely to ensure the forms are accurate. Make sure you have all the information handy before filling out any 1099s. Remind all the contractors to provide you with a W-9.
What is a W-9, and How is it Related to Form 1099?
A W-9 form is filled out by the contracted workers, who give precise details about themselves. It helps you issue a Form 1099 and allow the IRS to cross-verify each Form 1099 with the concerned contractor’s tax returns.
W-9 is a single-page form and asks for the following details:
- Business or individual’s name and address.
- Business or Individual’s company status (whether it is a corporation, LLC, or sole proprietor).
- Social Security Number (applicable for sole proprietorships and individuals)
- Tax ID Number (for applicable business entities)
Pro Tip
Request the independent contractors to submit their W-9 forms as soon as they start working with your nonprofit organization. It will help you save time when issuing Form 1099 during the tax season.
What Information Do You Need to Issue a 1099 Form?
Keep all the W-9 forms organized and accessible to simplify issuing the 1099 form for your nonprofit. You will require all the details from the W-9s.
Track payment and business information throughout your relationship with the contracted worker to complete all sections of Form 1099.
You will specifically need to extract the following data from your nonprofit’s system:
- Category of the payments made to the independent contractor.
- State and federal tax withholding information.
- The total non-employee payment the contractor received.
While Form 1099 is not extensive, furnishing wrong information or missing critical information can result in penalties. Ensure you have all the information in place before issuing Form 1099.
Types of Form 1099 for Nonprofits
You may need to issue multiple types of 1099 Forms based on your yearly expenses.
There are 21 different types of Form 1099:
- Form 1099-A, Acquisition or Abandonment of Secured Property
- Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
- Form 1099-C, Cancellation of Debt
- Form 1099-CAP, Changes in Corporate Control and Capital Structure
- Form 1099-DIV, Dividends and Distributions
- Form 1099-G, Certain Government Payments
- Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
- Form 1099-INT, Interest Income
- Form 1099-K, Payment Card, and Third-Party Network Transactions
- Form 1099-LS, Reportable Life Insurance Sale
- Form 1099-LTC, Long-Term Care and Accelerated Death Benefits
- Form 1099-MISC, Miscellaneous Income
- Form 1099-NEC, Nonemployee Compensation
- Form 1099-OID, Original Issue Discount
- Form 1099-PATR, Taxable Distributions Received from Cooperatives
- Form 1099-Q, Payments from Qualified Education Programs (Under Sections 529 and 530)
- Form 1099-QA, Distributions from ABLE Accounts
- Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- Form 1099-S, Proceeds from Real Estate Transactions
- Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
- Form 1099-SB, Seller's Investment in Life Insurance Contract
You issue Form 1099-NEC to all contracted individuals you pay throughout the year. You may also need to issue Form 1099-MISC to report expenses related to:
- Rent Paid
- Medical payments
- Attorney payments
- Royalties
Note: You are not required to pay a lump sum of $600 or more to a contractor to warrant a 1099 form. You must provide them with Form 1099-NEC even if you’ve made multiple payments exceeding $600 over the past year.
General Guidelines for Preparing Form 1099-NEC and 1099-MISC
Nonprofits must issue Form 1099-NEC for each person who received non-employee compensation of $600 or above from your organization. It includes
- Individuals
- Sole proprietorships
- Partnerships (limited and professional partnerships)
- Limited liability companies (LLCs), if they are single-member disregarded entities or elected to be taxed as partnerships
- Attorneys and law firms
- Independent contractors
- Directors who receive directors’ fees and other payments, including post-retirement compensations
You must use Form 1099-MISC to report the following payments:
- Rents (excluding payments made to a property manager or real estate agent)
- Compensation to deceased employees (including accrued wages, vacation pay, and payments made after the year of death for employees who died during the year)
- Gross proceeds payments to attorneys( Excluding payments made for the attorney’s services)
Situations That Do Not Require a Form 1099-NEC or 1099-MISC
Understanding when you do not need to issue 1099s is just as important as knowing when to issue one. For instance, scholarship grants are not reported in a 1099 form. These funding sources are considered wages and must be reported on the receiver’s IRS Form W-2.
W-2 forms are used to report payments nonprofits make to their staff. These forms also verify how much of your employees' annual compensations have gone to:
- The state and federal government
- Social security
- Medicare
Form 1099-NEC or 1099-MISC are not issued for:
- Payments made to a C corporation or S corporation.
- Payments for computers, merchandise, storage, etc.
- Wages paid to employees.
- Payments to an LLC elected to be taxed as a C corporation or S corporation.
- Payments to tax-exempt organizations.
- Business travel allowances to employees.
- Cost of current life insurance protection.
Note: Form 1099-NEC and 1099-MISC are created on a cash basis.
What Is The Timeline For Issuing 1099 Forms For Nonprofits?
Nonprofits generally have to send the 1099 forms to contract workers by the end of January, which is January 31st.
What are the Repercussions If You Fail to File Your 1099 Forms On Time?
Failure to file your 1099 forms may result in penalties from the Federal government.
The following penalties might be applicable when failing to issue 1099 forms on time:
- A fine of $50 if you file within 30 days from the due date.
- A fine of $110 if you take over 30 days from the due date but file before August 1st.
- A fine of $280 for filing after August 1st.
- A fine of $570 if you fail to file a form.
Note: These fines apply to delayed submission of each 1099. The penalties can multiply if you have several contract workers waiting for their forms.
Final Thoughts on Forms 1099 for Nonprofits
It is important to remember the specific reporting requirements when filing 1099 forms. There is no scope for mistakes while issuing these forms.
Ensure that you receive the correct documentation (Form W-9 or W-2) from anyone receiving payment from your nonprofit. Follow the guidelines precisely to avoid late filing and penalties from the federal government.
Keep Zeffy’s guide to nonprofit accounting handy while filing in the next tax year.
FAQs on Form 1099 for Nonprofits
Are 1099s required for nonprofits?
Yes. Tax-exempt organizations and nonprofits have to issue 1099 forms just like for-profit businesses when they hire contractors or vendors for their work.
The form is applicable when nonprofits compensate them with $600 or above.
Are churches exempt from 1099 tax reporting?
No. Like any other nonprofit entity, it is mandatory for churches to issue 1099 forms if they use freelance and contractual services.
Do I need a W-9 from a 501(c)(3) organization?
A W-9 form is required when someone contracts work from your organization, or you contract work from someone. It is required to request necessary tax information from the contractor.
If you have contracted a 501(C)(3) organization, you will need a W-9 form containing details like:
- Corporation Name
- Business Name
- Entity Type
- Exempt Payee Code
- Address
- Account Number
- Taxpayer Identification Number (In this case, Employee Identification Number issued by the IRS)
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