Form 1099 for Nonprofits: How and Why to Issue One
Wednesday, December 7, 2022
See how a nonprofit accountant can help you issue 1099s this year.Contact Jitasa
The IRS views your nonprofit’s employees and your contractors in different lights. The distinction between the two, according to the IRS is “that 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.”
While contractors provide a specialized service (without input on how to do that job) for your organization, your staff members are given a job description and told how their job should be performed in the office. This role distinction doesn’t only impact how work gets done, it also makes a big difference when it comes to tax season.
At the end of the year, you’ll issue a W-2 to each employee to help them complete their taxes. Meanwhile, if you hired contractors throughout the year, you may need to issue a Form 1099 instead.
Jitasa accountants prepare over 20,000 Form 1099s for nonprofits every year! With this first-hand experience, we’ve compiled a guide to help organizations better understand what 1099s are, why they’re important, and how to issue one. We’ll cover the following topics:
- What is a Form 1099?
- Why do nonprofits issue 1099s?
- How do organizations issue a Form 1099?
- What’s the timeline for issuing 1099s for nonprofits?
As a nonprofit professional, your primary focus should be dedicated to your organization’s mission, not confusing tax forms. That’s why thousands of nonprofits trust Jitasa to take care of their required tax documentation. When you outsource your accounting needs to Jitasa, we’ll issue your 1099 for you, saving you a lot of hassle.
That being said, it’s also important for you to understand what these forms are and how they’re used. Let’s dive a little deeper into 1099s for nonprofits.
What is a Form 1099?
A Form 1099 is the miscellaneous income tax form, used to prepare and file income information that is separate from wages, salaries, or tips. For nonprofits, you must issue this form when you contract individual workers and vendors to complete work for the organization.
As quoted by the IRS earlier, an independent contractor is classified as someone who is paid by a person or company possessing the right to control or direct the resulting work.
Oftentimes, the work that nonprofits need to complete doesn’t need to be handled by a brand new internal employee. Hiring employees and keeping up with compensation, benefits, and employee retention strategies can become very expensive very quickly.
If you don’t have quite enough work to warrant hiring a new employee, contract work might be the best answer for your organization.
Don’t get us wrong, hiring employees to manage different aspects of your nonprofit is key for growth! But be sure not to hire more employees than you can fairly pay or to hire prematurely and put your organization in a precarious financial position. Rather, carefully analyze if you should be hiring or contracting (or asking a volunteer with the appropriate experience) to complete the work that needs to be done.
Then, securely store all of the information regarding the work they completed for your organization and the payments you issued to them. This will help you if you need to issue 1099s for your nonprofit.
Why do nonprofits issue 1099s?
In order to file this form, your nonprofit needs to have top-notch bookkeeping systems. That’s because you’ll need to track the payments you make to all vendors (who are treated as independent contractors), persons, subcontractors, and independent contractors from whom you buy services.
You’ll know that you’ll need to issue a form 1099 when the following four conditions are met:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your nonprofit organization.
- You made the payment to an individual, partnership, vendor, or estate.
- You made payments to the payee amounting to at least $600 during the year.
Take, for example, a writer who you contracted to help with your organization’s website copy. They worked for your organization for six months to revitalize the website. Over that time frame, you paid the writer $10,000. In this case, you would definitely issue a form 1099 for that individual to remain tax compliant. They were an individual who was not your employee, helped develop something for your organization, and you paid well over $600 for their services.
Just as important as knowing when you should issue a form 1099, your organization should know when you don’t need to issue one. For example, in the case of scholarships or fellowship grants, you won’t need to issue a 1099. This is because these funding sources are considered wages and are reported on a IRS Form W-2.
Other payments for which a Form 1099-MISC is not required include:
- Generally, payments to a corporation (although there are always exceptions)
- Payments for merchandise, computers, storage, and similar items
- Payments of rent to real estate agents
- Wages paid to employees (report on Form W-2)
- Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (report on Form W-2)
- Business travel allowances paid to employees (may be reportable on Form W-2)
- Cost of current life insurance protection (report on Form W-2 or Form 1099-R)
- Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government
Form 1099s for nonprofits may seem a bit confusing at first glance. However, if you follow the four guidelines listed above, you should have no trouble determining when it’s appropriate for your nonprofit to issue the proper form.
If you do have a confusing situation or want some assistance with the issuing process, we recommend working with a specialized nonprofit accountant. Jitasa’s expert accounting team helps nonprofits determine the exact situations when a 1099 is necessary and fills out the required paperwork for you.
See how a nonprofit accountant can help you issue 1099s this year.Contact Jitasa
How do organizations issue a form 1099 for nonprofits?
As we mentioned earlier, nonprofits need to implement effective bookkeeping practices to ensure their 1099 forms are all complete and accurate. Before you even start thinking about the 1099, you have to ask your contracted workers to fill out a form W-9.
What is a W-9 and how does it relate to your nonprofit’s 1099?
The W-9 is a simple form that you ask your contracted workers to fill out before you get started on the 1099. It’s an important document because it allows the IRS to match up the 1099 forms that you report and the tax returns that are filed by the contracted individual.
The W-9 form is only a single page asking for:
- Business and/or Individual’s Name and Address
- Business and/or Individual’s status (i.e., corporation, LLC, sole proprietor, etc.)
- Social Security Number (for sole proprietorships and individuals)
- Tax ID Number (for applicable business entities)
We recommend that you ask contracted workers to fill out the W-9 at the very beginning of your working relationship with them. This will save your organization a lot of time and energy when the end of the year rolls around.
What information do you need to issue a form 1099?
When you go to issue the necessary 1099s for your nonprofit, you’ll need to include the information requested in the W-9s, so be sure to keep these forms organized for easy access! However, that’s not everything you’ll need. You’ll also need to track information throughout your relationship with the contracted individual to include on the form.
Specifically, you’ll have to pull together the following information:
- The category of the payment
- An account number
- Tax withholding information
- Total non-employee compensation
The form is fairly short, but if you misplace any information or fill it out incorrectly, you’ll be responsible for any resulting penalties. The screenshot below shows what the form is liable to look like:
What’s the timeline for issuing 1099s for nonprofits?
So you know that your contractor will need to use this form to file their own taxes, meaning you’ll need to file this form fairly early in the tax preparation process. But when do you need to have them completed by?
If you have 1099s to send out, bookmark your calendar to make sure they’re completely done and sent off before January 31st. Of course, earlier in the month is advised in order to reduce your own stress levels.
When you purchase your 1099s for your nonprofit to fill out, you’ll also find a form 1096 and related instructions in the pack. This form should also be filed along with the 1099s. The 1096 is essentially a compiled list of all the 1099s issued by your organization.
What happens if you don’t file on time?
There are penalties if your organization fails to file your 1099 on time or files it incorrectly. These penalties create a financial burden and hindrance that you definitely don’t want to encounter. They also apply per 1099 form that your organization issues.
Here are the penalties you’ll encounter:
- $30 penalty for filing a 1099 less than 30 days late
- $60 penalty for filing a 1099 more than 30 days late and before August 1
- $100 penalty for filing a 1099 on or after August 1
- $250 penalty for intentional failure to file
As you can see, these penalties are not small. If you file more than one 1099 form during the course of the year, the fees can really add up. The best way to avoid this is to file correctly and on time.
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Tax season is never exactly fun. However, it doesn’t need to be a daunting task each and every year. By keeping all of your forms well organized, your nonprofit never needs to worry about enduring stress during this time of the year. However, it always helps to have an expert on your team!
Learn more about other tax season topics that accounting experts can help you with by reviewing these helpful resources:
- How to Fill Out a W-9 for Nonprofits and When it’s Necessary. To file your 1099, you first need access to the information on W-9s for each of your contractors. Learn more about W-9 Forms for nonprofits in this comprehensive guide.
- Form 990 Filing: Your Essential Guide to Nonprofit Taxes. Learn all about the annual Form 990 tax form, which type your organization needs to complete, due dates, penalties, and more in this helpful guide.
- Nonprofit Financial Ratios: Definitions & Calculators. As you issue your 1099s and file other tax forms, your nonprofit will also prepare for next year’s finances. Make sure your nonprofit is in a healthy position by calculating key financial ratios with Jitasa’s free calculators.
Do you need to issue 1099s for your nonprofit’s contractors this year?
Talk to a dedicated accountant to see how Jitasa can help.Learn more