Businesses must report nonemployee compensation and backup withholding

George Orwell in his book 1984 where he coined the term “Big Brother” as it turns out was not that far off from his vision of the future, just in the wrong arena.

By law businesses that pay or receive nonemployee compensation of $600 or more must report these payments to the IRS.

They do this using Form 1099-NEC, Nonemployee Compensation.

Businesses that make such payments must file Form 1099-NEC by January 31 each year with no extensions available meeting that deadline.

Nonemployee compensation is subject to backup withholding if a payee has not provided a Taxpayer Identification Number to the payer, or the IRS notifies the payer that the payee provided a TIN that does not match their name in IRS records.

A TIN can be one of the following numbers:

  • Social Security
  • Employer identification
  • Individual taxpayer identification
  • Adoption taxpayer identification

Backup Withholding

Backup withholding applies to most kinds of payments reported on Forms 1099 and W-2G.

The person or business paying the taxpayer does not generally withhold taxes from non-employee payments however there are situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income.

The payer’s requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding.

The current backup withholding tax rate is 24%.

We suggest that when contracting a non-employee that a W9 is obtained before making any payments to the payee, and if not received that the payee is informed that backup withholding will be made if the W9 is not returned, and properly completed.

The payor can be found to be deficient in their responsibilities if a properly completed W9 is not in hand before payments are made to the payee and required to pay the backup withholding themselves along with additional penalties.