Founders, for 2021, there is a new tax form to report payments to contractors – 1099-NEC. This form is different from the 1099-MISC form, previously used to report payments to contractors. The threshold is still $600, and the deadline is February 1st, 2021.
For founders of tech companies using payroll/payment services like Gusto or Justworks, you may have paid most of your contractors through those platforms. However, there may have been payments made directly from your bank account that will need to factor in.
It’s important to reach out to all your potential contractors for a complete Form W9, which will be needed to correctly report their compensation.
The 1099-MISC still exists, however, you would only need it for the following:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
If your tech company is paying foreign contractors, it may help to understand whether any of the income could be considered U.S. Source income. It’s helpful to have all your foreign contractors complete Form W8-BEN to ensure that they are compliant with tax treaties and 30% foreign withholding requirements.
For tech companies that may have convertible note conversions that occurred in 2020, you will need to report the interest on 1099-INT statements, which are also due on Febuary 1st. This generally occurs during a fundraising event, so a Seed or Series-A round may have triggered a note conversion. You will need to have your investors provide a Form W9 to report these payments to the correct taxpayer.
Stock Compensation Reporting:
If your startup had ISO (Incentive Stock Option) exercises during the year, these would also need to be reported on Form 3922 by on Febuary 1st.. Some services like Carta may offer assistance with preparing these forms, however, it is your company’s responsibility to make sure they are filed on time.
Other stock compensation may need to be reported on Form W2, so it’s important to review any exercises that may trigger a taxable event for your employees and company to report.
As ever we love working with founders to help take away the pain of onerous reporting requirements, so feel free to reach out if you have any questions.