Form 1099 for Nonprofits: How and Why to Issue One

Monday, December 11, 2023

Each of your nonprofit’s staff members has a specific job description that dictates how their role should be performed. Contractors, on the other hand, provide a specialized service for your organization and have full control over how their work is accomplished. This role distinction not only impacts how work gets done—it also makes a big difference when it comes to tax season.

At the end of every year, you’ll provide each employee with a W-2 to help them complete their taxes. However, if you worked with contractors, you may need to issue a 1099 to them instead.

Jitasa accountants prepare more than 20,000 Form 1099s for nonprofits every year! With this firsthand experience, we’ve compiled a guide to help organizations better understand what 1099s are, why they’re important, and how to issue one. Here is what we’ll cover:

• What Is Form 1099?
• Why Do Nonprofits Need To Issue 1099s?
• How Does A Nonprofit Issue Form 1099?
• What Is The Timeline For Issuing 1099s For Nonprofits?

As a nonprofit professional, your primary focus should be your organization’s mission. That is why thousands of nonprofits trust Jitasa to take care of their required tax documentation, reducing stress and saving their teams time. However, it’s still important for you to understand what these forms are and how they’re used.

What Is Form 1099?

The IRS Form 1099 (or 1099-NEC) is the miscellaneous income tax form which is used to prepare and file income information that is separate from wages, salaries, or tips. Nonprofits like yours need to issue this form when you contract individual workers and vendors to complete work for your organization.

According to the IRS, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

Many types of nonprofit work don’t need to be completed by brand-new internal employees. Of course, hiring is essential if you want to grow your organization. But you’ll need to be strategic about when and why you hire new staff members. Necessary hiring processes such as recruiting, onboarding, and keeping up with compensation, benefits, and employee retention strategies can become very expensive very quickly.

If you don’t have quite enough work to warrant hiring a new employee, contracting might be the best answer for your organization. This is especially true when you only need extra help for one particular project. For instance, you might contract a web developer to redesign and relaunch your nonprofit’s website or a construction company to renovate your facility.

Once you decide to hire a contractor, securely store all of the information regarding the work they completed for your organization and the payments you issued to them. This data will be useful if and when you need to issue 1099s for your nonprofit.

Why Do Nonprofits Need To Issue 1099s?

You’ll know that you’ll need to issue a form 1099 when the following four conditions are met:

• You made a payment to someone who is not your employee.
• You made a payment to an individual, partnership, vendor, or estate.
• You made a payment for services in the course of your nonprofit organization.
• You made payments amounting to at least $600 during one calendar year.

Take, for example, a graphic designer who you contracted to help create marketing materials for your nonprofit’s GivingTuesday campaign. Let’s say they worked for your organization from August to November of this past year, and you paid them $5,000 over that time frame. In this case, you would definitely need to issue a form 1099 for that individual to remain tax compliant. They’re an individual who isn’t your employee, and they provided a service to your nonprofit that you paid more than $600 for.

Just as important as understanding when you should issue a 1099 is knowing when you don’t need to issue one. For example, in the case of scholarships or fellowship grants, you won’t need to issue a 1099. These funding sources are considered wages and are reported on the recipient’s IRS Form W-2.

Other payments for which Form 1099-NEC is not required include:

• Most payments to corporations (although there are always exceptions)
• Payments for merchandise, computers, storage, and similar items
• Payments of rent to real estate agents
• Wages paid to employees (report on Form W-2)
• Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (report on Form W-2)
• Business travel allowances paid to employees (report on Form W-2)
• Cost of current life insurance protection (report on Form W-2 or Form 1099-R)
• Payments to tax-exempt organizations including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state government, the District of Columbia, a U.S. possession, or a foreign government

Form 1099 may seem a bit confusing at first glance. However, if you follow the four guidelines listed above, you should have no trouble determining when it’s appropriate for your nonprofit to issue that form.

If you have a confusing situation or want some assistance with the issuing process, we recommend working with a nonprofit accountant. Jitasa’s expert accounting team will help your organization determine the exact situations when a 1099 is necessary and fill out the required paperwork for you.

How Does A Nonprofit Issue Form 1099?

In order to issue your 1099s properly, your nonprofit needs to have top-notch bookkeeping systems. You’ll need to track the payments you make to all vendors (who are treated as independent contractors), individuals, subcontractors, and other independent contractors to ensure all of your forms are accurate.

Additionally, your organization won’t have all of the information you need without the contractor’s input. Before you begin filling out any of your nonprofit’s 1099s, you have to ask each of your contracted workers to provide you with a W-9.

What is a W-9 and how does it relate to Form 1099?

A W-9 is a simple form that you ask contracted workers to fill out so you have the information you need to issue them a 1099. It also allows the IRS to match up each Form 1099 that you report with the right contracted individual’s tax returns.

Form W-9 is only one page long, and it asks for the following information:

• Business and/or Individual’s Name and Address
• Business and/or Individual’s status (i.e., corporation, LLC, sole proprietor, etc.)
• Social Security Number (for sole proprietorships and individuals)
• Tax ID Number (for applicable business entities)

We recommend that you ask contracted workers to fill out their W-9 at the very beginning of your working relationship with them. This will save your organization time and energy when it comes time to issue 1099s.

What information do you need to issue a 1099?

When you issue 1099s for your nonprofit, you’ll need to include the information requested in the W-9s, so make sure to keep these forms organized for easy access! Additionally, you’ll need to track information throughout your relationship with the contracted individual to complete all sections of the form.

Specifically, you’ll have to figure out the following information from the data in your nonprofit’s system:

• The category of the payments made to the contractor
• Federal and state tax withholding information
• The total non-employee compensation the contractor received

Form 1099 is fairly short, but there are penalties for including incorrect information or leaving anything out, so double-check that you have everything you need before you start. Here is an example of what the form will look like:

What Is The Timeline For Issuing 1099s For Nonprofits?

Because each contractor will need to use their Form 1099 to file their own taxes, your nonprofit will have to complete these forms fairly early in the tax preparation process. The deadline for payers to file all of their 1099s for the previous calendar year is January 31. Of course, the earlier you can get them done, the better.

When you purchase your 1099s for your nonprofit to fill out, you’ll also find a copy of Form 1096 and related instructions in the pack. This form is essentially a compiled list of all the 1099s your organization issues and should also be filed by January 31.

What happens if you don’t file your 1099s on time?

There are penalties if your organization fails to file your 1099 on time or files it incorrectly. They also apply per 1099 form that your organization issues.

Here is a breakdown of the fines for filing each required 1099 late:

• $30 penalty for filing up to 30 days late
• $60 penalty for filing more than 30 days late and before August 1
• $100 penalty for filing a 1099 on or after August 1
• $250 penalty for intentional failure to file

If you file more than one 1099 late in a given year, the fees can really add up. The best way to avoid these penalties is to file correctly and on time.

By becoming familiar with what Form 1099 entails and why to issue one, you’ll be able to maintain compliance when it comes to your organization’s contracted workers, and you might just find tax season a bit less overwhelming. However, it always helps to have experts on your side—like Jitasa’s experienced nonprofit accounting team!

For more information on filing tax forms for your nonprofit, check out these resources:

• How to Fill out a W-9 for Nonprofits and When It’s Necessary. Dive deeper into the requirements and best practices for requesting taxpayer information from contracted workers using Form W-9.
• Nonprofit Form 990 Filing: An Essential Tax Guide. Learn everything you need to know about filing your nonprofit’s most important annual tax form—the IRS Form 990.
• Outsourced Accounting for Nonprofits: Top 10+ Firms. Discover the benefits of working with an outsourced nonprofit accountant during tax season and beyond and explore our top recommendations.

File your nonprofit's 1099s with the help of Jitasa's expert accountants.

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