In the complex financial landscape nonprofits must navigate, proper tax reporting is essential to ensure compliance and avoid costly penalties. Various IRS forms play a pivotal role in nonprofit reporting, particularly the 1099 series, which encompasses different forms used to report specific types of income. Understanding which form applies in each situation is crucial for nonprofits paying contractors and vendors, and managing digital payments.
As a trusted CPA firm serving nonprofits nationwide from our base in Chicago, SSL Associates is here to help simplify these requirements. Our goal is to ensure that your organization’s tax and reporting obligations are handled accurately, allowing you to focus on your mission without added administrative stress.
Table of Contents
Types of 1099 Forms: A Breakdown for Nonprofits
Here’s a quick breakdown to help nonprofits determine which 1099 Form applies in common situations.
#1. Form 1099-NEC: Non-Employee Compensation
The 1099-NEC forms report payments of $600 or more to independent contractor income for services provided during the tax year.
Nonprofits should use the 1099-NEC if:
- They’ve hired non-employee contractors to perform specific services.
- The contractor’s earnings exceed $600 in the year.
- Payments were made through cash, check, or ACH, not processed through a third-party payment platform like PayPal or Venmo.
Key points:
- Reporting threshold: $600 or more, regardless of transaction count.
- Who issues it: The nonprofit or organization hiring the contractor.
- Example: If a nonprofit hires a graphic designer on a contract basis, the designer will receive a 1099-NEC if payments exceed $600.
#2. Form 1099-MISC: Miscellaneous Income
Historically, the 1099-MISC was the primary form for reporting non-employee compensation, but it now covers different types of payments.
Nonprofits should use the 1099-MISC for:
- Rent payments, awards, prizes, broker payments, or royalties.
- Medical and healthcare-related payments made to providers.
- Payments made to attorneys (for legal settlements or fees).
Details:
- Threshold: Generally $600 or more, except for royalties (only $10).
- Payment method: Primarily cash, check, or ACH; Not intended for payment card or network transactions.
- Who issues it: Nonprofits or businesses making qualifying payments.
- Example: A nonprofit renting office space or paying an attorney for legal work must issue a 1099-MISC if payments exceed $600.
#3. Form 1099-K: Payment Card and Third-Party Network Transactions
The 1099-K is designed for reporting income generated via payment card and third-party network transactions. This form is unique in that it is only issued by third-party payment processors (TPP) or third-party settlement organizations (TPSO):
- Issued by: Payment processors like PayPal, Venmo, Square, or credit card companies.
- Threshold: Required to report transactions when the amount of total payments for those transactions is more than $5,000 in 2024; more than $2,500 in 2025; and more than $600 in calendar year 2026 and after.
Application in nonprofits:
- Use cases: Nonprofits that receive donations or payments for services through digital platforms may receive a 1099-K from the payment processor.
- Example: A nonprofit receiving donations via PayPal or ticket sales through a platform like Eventbrite would likely receive a 1099-K if the transaction criteria are met.
1099-NEC vs 1099-MISC vs 1099-K: Quick Comparison
Each 1099 form has specific filing requirements related to payment methods, who files it, and deadlines:
- Form 1099-NEC reports non-employee compensation, covering payments of $600 or more made by businesses or individuals to independent contractors, freelancers, and similar workers. Accepted payment methods include cash, checks, ACH, or direct deposit. The filing deadline is January 31 for both recipient and IRS copies, regardless of filing method.
- Form 1099-MISC is for miscellaneous payments, such as rent, awards, royalties (threshold of $10), or direct sales ($5,000 threshold), with payments typically made via cash, checks, or bank transfers. The business or organization issuing these payments must file Form 1099-MISC. Deadlines include January 31 for recipient copies and February 28 for IRS paper filing (or April 1 if e-filing).
- Form 1099-K is filed by payment processors or third-party settlement organizations (not businesses directly) and covers digital payments through credit cards, debit cards, and payment platforms like PayPal or Stripe. The 1099-K is required when the amount of total payments for those transactions is more than $5,000 in 2024; more than $2,500 in 2025; and more than $600 in calendar year 2026 and after. Deadlines are January 31 for recipient copies, with filing to the IRS by February 28 for paper proposals or April 1 for e-filing.
Importance of Compliance and Common Pitfalls
For nonprofits, compliance is non-negotiable, not only because of potential IRS penalties but also due to the reputational importance of accurate financial reporting. Failing to issue 1099s appropriately can lead to serious consequences, including:
- Financial penalties: Nonprofits that fail to file required forms face penalties that increase with the lateness and degree of oversight.
- Reporting errors: Misclassifying income types or issuing incorrect forms can create discrepancies, resulting in confusion or unnecessary IRS scrutiny.
Handling Errors in Form 1099 Reporting
If you receive a Form 1099 in error or notice incorrect information, there are specific steps to resolve these issues.
For example, if a Form 1099-K is issued for personal transactions (like reimbursing a friend or selling personal items), this is typically a mistake, as such payments are not taxable. In these cases, you should contact the payment processor listed on the form to request a correction. If a correction isn’t possible, report the incorrect amount on your Schedule 1 (Form 1040) under “Other income” with a notation like “Form 1099-K received in error”.
For duplicate reporting issues, such as receiving both a 1099-K and a 1099-NEC or 1099-MISC for the same income, report the income only once to avoid double taxation. Maintaining detailed records is critical to substantiate the correct income amount if questioned by the IRS.
Key Updates for 2024
The IRS plans to roll out changes to the 1099-K threshold in 2024, reducing it to $5,000 as a step toward an eventual $600 threshold. This shift may bring more nonprofits into the scope of 1099-K reporting, especially those receiving donations or payments via digital payment apps. Keeping updated with these changes is essential for accurate reporting.
Need Help Ensuring Your 1099 Filings Are Complete and Compliant?
Contact SSL Associates today for tailored nonprofit CPA services!
SSL Associates — Your Partner in Simplifying 1099 Reporting for Nonprofits
As IRS requirements around reporting evolve, nonprofits need reliable CPA partners to manage these changes. At SSL Associates, we specialize in nonprofit tax services, offering our expertise nationwide. With our help, nonprofits can navigate complex 1099 regulations smoothly and focus on their missions without the burden of regulatory confusion.
Ready to streamline your nonprofit’s financial reporting? Contact SSL Associates today and let us handle the complexities of 1099 compliance for you!
FAQ
How can you correct Form 1099-K if the reported gross amount is inaccurate?
If the gross amount on Form 1099-K isn’t correct (due to shared terminals, business structure changes, or other reasons), contact the payment settlement entity (PSE) to correct it. Accurate reporting of gross receipts and other income payments helps prevent errors in federal income tax reporting.
Are credit card rewards and cashback taxable?
No, credit card rewards and cashback are not taxable income. They don’t need to be included on Form 1099-K or any federal income tax forms, as they’re typically considered rebates or discounts.
What if you receive Form 1099-K for personal items sold?
If you sold personal items at a loss, report the gross payment on Schedule 1 (Form 1040) or Form 8949, offsetting it as a loss. For gains, report it on Form 8949 and Schedule D (Form 1040), as gains are taxable income.
