Fact Sheet – Requirements for Reporting of Payments to Independent Contractors Payments to independent contractors are subject to a number of requirements under federal and state tax law. Federal Reporting Requirements Under federal law you have to file Form 1099-NEC, Nonemployee Compensation, or Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business. If the following four conditions are met, you must generally report a payment as nonemployee compensation.
  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  3. You made the payment to an individual, partnership, estate, or in some cases (such as any payments to an attorney), a corporation; and
  4. You made payments to the payee of at least $600 during the year.
In order to gather the information required for this reporting, we recommend that you present a Form W-9, Request for Taxpayer Identification Number and Certification to any independent contract at the time you engage them, or before you process any payments to them. The Form 1099s need to be sent to the contractors by January 31 and filed with the IRS by the last day of February of the year following the payment. For more information, see: https://www.irs.gov/businesses/small-businesses-self-employed/reporting-payments-to-independent-contractors California Reporting Requirements Under California law, you must report information to EDD within twenty (20) days of either making payments totaling $600 or more or entering into a contract for $600 or more with an independent contractor in any calendar year, whichever is earlier. You should submit a Form DE 542, Report of Independent Contractor(s) electronically with e-Services for Business or by mail to the address indicated on the form. You will need to provide the following information concerning your contractor payments. Business or government entity’s (service-recipient):
  • Federal employer identification number or social security number
  • California employer account number (if applicable)
  • Business name, address, and telephone number
Independent contractor’s (service-provider):
  • First name, middle initial, and last name
  • Social security number
  • Address
  • Start date of contract (if no contract, date payments equal $600 or more)
  • Amount of contract, including cents (if applicable)
  • Contract expiration date (if applicable)
  • Ongoing contract (check box if applicable)
For more information, see: https://edd.ca.gov/Payroll_Taxes/Independent_Contractor_Reporting.htm Penalties for failure to comply If you fail to file Form 1099, the penalty is as follows:
  • $50 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $532,000 per year ($186,000 for small businesses, defined below).
  • $100 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,596,500 per year ($532,000 for small businesses).
  • $260 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,193,000 per year ($1,064,000 for small businesses).
You can request relief from these penalties if you can show that your failure to file the information returns was due to reasonable cause and not to willful neglect. On the other hand, if your failure to file the returns is due to intentional disregard of the requirements, the penalty doubles to $530 per statement, with no maximum penalty. Additionally, the IRS will take the position that any deductions for payments to contractors which are not reported on Form 1099 should be disallowed. The EDD may assess a penalty of $24 for each failure to comply with its reporting requirements within the required time frames, or a penalty of $490 may be assessed if the failure to report independent contractor information is the result of conspiracy between the service-recipient and service-provider not to supply the required report or to supply a false or incomplete report. Backup Withholding If a contractor refuses to provide his or her tax identification number, you should withhold 28 percent for federal and 7 percent for California of the payment as backup withholding. If you fail to do so, you may become liable for any uncollected amounts. Additional information is available via the following publications: This information is provided by Tarlson & Associates, an independent certified public accounting firm which serves individuals, businesses, estates, trusts and nonprofits worldwide. We have significant experience assisting our clients with evaluating their options when hiring employees and engaging contractors. Please let us know if we can be of further assistance in assisting with your reporting of Independent Contractor Payments.