Many businesses choose to focus on their core competence by outsourcing services from other organizations or individuals. We often refer to them as Subcontractors, Contractors, or outside services. As the year-end approached, companies who paid for these outside services require to report to the IRS the amount they paid by filing form 1099 – Misc. or 1099-NEC in 2020.
Outsources organizations and individuals must submit a Form W9, which provides information such as social security or EIN needed to report non-employee compensations on the 1099 form. This form implies to IRS that the payer paid compensation and no tax was withheld.
When a 1099 recipient failed to provide a correct TIN (SS or EIN), the payer may receive an IRS notice CP-2100A, advising the payer that the TIN on the reported 1099 does not match the IRS records. The notice also suggests that the payer may be responsible for beginning backup withholdings for the listed payees.
The payer should compare the notice with their account records and take appropriate actions.
Payees may be subject to backup withholding if they:
- Fail to give a TIN
- Give an incorrect TIN
- Improperly supply a TIN
- Under-report interest or dividends on their income tax return
- Fail to certify that they’re not subject to backup withholding for underreporting of interest and dividends
Payers are required to withhold 24 percent in backup taxes if they are not successful in resolving any of the above matters.