Do Nonprofits Need to Issue 1099 Forms?

Like all entities, nonprofit organizations must adhere to IRS regulations, including issuing Form 1099. This form is essential for reporting payments made to independent contractors and non-employee service providers. To avoid penalties and ensure accurate reporting, nonprofit organizations need to understand when and how to issue Form 1099.

Professional nonprofit tax services help organizations navigate these requirements, ensuring compliance and allowing nonprofits to focus on their mission. Here’s a comprehensive guide to Form 1099 for nonprofits, from definitions to best practices for filing.

What Is Form 1099?

Form 1099 is an IRS document that nonprofit organizations use to report various types of non-wage income paid to individuals or entities. This miscellaneous income tax form is essential for capturing income not typically reported through standard payroll processes. By issuing Form 1099, nonprofits help ensure recipients report payments accurately and maintain transparency and compliance with federal tax laws.

Nonprofits may need to issue different types of 1099 forms based on their annual expenditures. For any contractors you pay over $600 throughout the year, you must issue a 1099-NEC form, even if the amount is reached through multiple payments.

Additionally, 1099-MISC forms are required for specific expenses, such as:

• Rent
• Medical payments
• Attorney fees
• Royalties

When Do Nonprofits Need to Issue Form 1099?

A nonprofit organization must issue Form 1099 when four conditions are met:

• The payment is made to someone who is not an employee.
• Is directed to an individual, partnership, vendor, or estate.
• Is for services rendered in the course of the nonprofit's activities.
• Totals at least $600 in a calendar year.

For example, if a nonprofit pays a graphic designer $5,000 for creating marketing materials, a 1099 form is required.

Instances Where a 1099 Form Isn’t Required

Nonprofit organizations don’t need to issue a 1099 form for every payment. The Internal Revenue Service (IRS) provides several exceptions.

For instance:

• Fellowship grants or scholarships (reported on W-2).
• Payments to corporations.
• Rent payments to real estate agents.
• Employee business travel allowances (reported on W-2).
• Military differential wage payments (reported on W-2).
• Life insurance protection costs.
• Payments for computers, merchandise, or storage.
• Payments to tax-exempt organizations, such as IRAs, HSAs, Archer MSAs, Coverdell ESAs, federal or state governments, U.S. possessions, or foreign governments.

Collecting Information for Form 1099

A nonprofit tax-exempt organization must collect the following information to complete Form 1099-MISC properly:

• Name of the recipient.
• Address of the recipient.
• Taxpayer Identification Number (TIN) for applicable business entities or Social Security Number (SSN).
• Type of income and amount paid.
• Date of payment.
• Your nonprofit’s TIN.

It’s ideal to use Form W-9 to gather this information. Make sure these details are accurate and organized to avoid penalties for incorrect or incomplete submissions.

Compliance Deadlines for Issuing Form 1099

A nonprofit organization must adhere to strict deadlines when issuing Form 1099 so that contractors can file their taxes on time. Forms must be sent to contractors by January 31, allowing them to start their tax preparation process promptly. Additionally, nonprofits must file Form 1096, a summary of all 1099s issued, with the IRS by the same deadline.

Penalties for Late or Incorrect Filing of Form 1099

Nonprofit foundations may incur penalties for late or incorrect filing of Form 1099 to independent contractors.

The fines include:

• $50 per form if filed within 30 days of the deadline.
• $110 per form if filed over 30 days late but before August 1.
• $280 per form if filed after August 1.
• $570 per form for intentional failure to file.

These penalties apply per form, so multiple late filings can result in substantial fines. To avoid these, make sure forms are submitted on time and accurately.

Best Practices for Filing Form 1099

To ensure your nonprofit accurately and punctually files Form 1099, here are some best practices to follow:

• Collect Form W-9: Require vendors and contractors to complete Form W-9 before engaging in transactions.
• Verify tax information: Confirm the accuracy of the provided tax identification details.
• Maintain detailed records: Keep thorough records of all payments, invoices, and receipts.
• Check payment thresholds: Ensure payments to each vendor exceed $600 annually.
• Determine eligibility: Identify which vendors qualify for Form 1099 reporting.
• Utilize electronic filing: Use electronic systems to file forms for accuracy and timeliness.
• Distribute forms on time: Send 1099 forms to vendors by January 31, preferably via email.
• Submit to the IRS: File Form 1099 (Copy A) with the IRS and retain Copy C for your records.
• File Form 1096: Submit a summary form that includes all 1099s issued.
• Choose proper payment methods: Consider using debit cards, credit cards, or PayPal, as these processors are responsible for issuing the 1099 forms.