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Nonprofits often have two types of professionals: employees and contractors. Employees are on recurring payroll and have consistent roles, while contractors provide specialized services as needed. This distinction impacts tax filings. At the end of the year, nonprofits provide employees with a W-2 for tax filing, while contractors may require a Form 1099. This form is used for income separate from wages, salaries, or tips, and nonprofits typically use Form 1099-NEC for independent contractors and Form 1099-MISC for vendors. Determining when to include rental income in unrelated business income (UBI) tax calculations can be challenging, and specific types of rental income are considered taxable by the IRS. While rents are generally excluded from UBIT, certain factors, such as property type and its relation to the organization's mission, must be considered when determining if rental income is UBI.
| Characteristics | Values |
|---|---|
| When to issue Form 1099 | When the payment recipient is not an employee of the nonprofit and is an individual, partnership, vendor, or estate |
| Types of Form 1099 | Form 1099-NEC (Nonemployee Compensation) and Form 1099-MISC (Miscellaneous Information) |
| When to use Form 1099-NEC | When working with independent contractors or freelancers |
| When to use Form 1099-MISC | When working with other types of vendors, such as when renting a building from a nonprofit corporation |
| Rental income for nonprofits | Considered taxable by the IRS if it is from real property or personal property and is not substantially related to the organization's mission |
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What You'll Learn
Nonprofits and 1099s: when to issue one
Nonprofits, like any other organisation, may need to issue or receive a Form 1099 under certain circumstances. Nonprofits must issue a Form 1099 when they contract individual workers and vendors to complete work for their organisation. There are two types of 1099s: Form 1099-NEC (Nonemployee Compensation) and Form 1099-MISC (Miscellaneous Information). Form 1099-NEC is used when working with independent contractors or freelancers, while Form 1099-MISC is used with other types of vendors.
Nonprofits must issue a Form 1099-NEC to independent contractors they hire if specific payment criteria are met. For example, if a nonprofit hires an independent contractor for various services and pays them $600 or more, it must issue a Form 1099-NEC to report these payments. Similarly, freelancers who receive payments over $600 are issued a 1099-NEC. Nonprofits may also receive a Form 1099 from the payer when they provide services or earn certain types of income.
To issue 1099s correctly, nonprofits need to accurately track all payments to contractors using bookkeeping systems. Before filling out any 1099s, nonprofits must ask each contracted worker to provide a Form W-9, which collects information such as the worker's Social Security Number or Tax ID Number. This form allows the IRS to match each reported 1099 with the correct contractor's tax returns. Nonprofits should request that contracted workers complete Form W-9 at the beginning of their working relationship.
There are situations where nonprofits do not need to issue a 1099. For example, scholarships or fellowship grants are considered wages, so nonprofits should complete a Form W-2 for the recipient instead. Most payments to corporations do not require a 1099, although there are exceptions for payments for medical, health, or legal services. Additionally, nonprofits do not need to report payments for merchandise.
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1099-NEC and 1099-MISC: differences explained
Form 1099-NEC and Form 1099-MISC are both used to report payments of more than $600 to non-employees. However, the key difference lies in the nature of the payments and the type of employment relationship involved.
Form 1099-NEC, which stands for "non-employee compensation," is used specifically for reporting non-employee compensation that is likely subject to self-employment tax. This includes payments to contractors, consultants, freelancers, and other self-employed individuals who are not on the company's payroll but perform services for the company. It is important to note that Form 1099-NEC should not be filed for employees, who instead require a Form W-2 for reporting wages, tips, and other compensation.
On the other hand, Form 1099-MISC, short for "miscellaneous," is used to report miscellaneous income or payments that are not subject to self-employment tax. This includes rent payments, royalties, legal fees, prize winnings, and other types of income that do not fall under employee compensation.
Prior to the 2020 tax year, businesses reported all non-employee compensation in box seven of Form 1099-MISC. However, due to confusion regarding dual-filing deadlines, the IRS introduced Form 1099-NEC specifically for reporting non-employee compensation.
The due dates for these forms also differ. Form 1099-NEC is typically due by January 31 following the tax year, regardless of the filing method. On the other hand, Form 1099-MISC is generally due by February 28 (or February 29 in leap years) if filed by paper and March 31 if filed electronically.
It is important for businesses to understand the distinction between these forms to ensure accurate and timely reporting of payments to contractors and other non-employees.
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Rental income and unrelated business income (UBI) tax
Nonprofit organizations often work with two types of professionals: employees and contractors. Employees are on the organization's payroll and have consistent roles, while contractors provide specialized services as needed. At the end of the year, nonprofits must provide employees with a W-2 form to help them file their taxes. On the other hand, nonprofits may need to issue a 1099 form to contractors.
The 1099 form, or Form 1099-MISC, is a tax form used to report income separate from wages, salaries, or tips. Nonprofits must issue this form when they hire independent contractors or freelancers and pay them at least $600 during the year. The form is typically due by January 31 of the following year.
Rental income from real property received by exempt organizations is generally excluded from unrelated business taxable income (UBTI). However, there are exceptions where rent may not qualify for this exclusion. For example, if the organization provides substantial personal services to lessees, if more than 50% of the rent is for the use of personal property, or if the property is debt-financed or leased to a controlled entity.
If a nonprofit organization conducts more than one unrelated trade or business, it must calculate its unrelated business taxable income (UBTI) separately for each trade or business. This calculation can be complex, and organizations should refer to the IRS guidelines for detailed instructions. Any applicable tax credits, such as the investment credit or foreign tax credit, can reduce the tax computed on the total UBTI.
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When is rental income taxable for nonprofits?
Rental income is a common revenue stream for nonprofits, but determining when it is taxable can be challenging. In general, rental income derived from passive activity is excludable from unrelated business income (UBI) reporting. However, there are specific types of rental income that the Internal Revenue Service (IRS) considers taxable.
Firstly, it is important to distinguish between real property and personal property. Real property refers to land and any buildings or structures permanently attached to the land, while personal property includes furniture and equipment. Rental income from real property can be classified as related, unrelated, or excluded revenue, whereas rental income from personal property is typically considered UBI.
Several factors determine whether rental income is subject to UBI tax reporting:
- The type of property: Is it real property or personal property?
- Relevance to the organization's mission: Is the rental income substantially related to the organization's mission?
- Contract structure: What are the terms of the rental contract? Does it include any additional services?
- Debt status of the property: Is the property debt-free or debt-financed?
If a nonprofit provides additional services along with renting space, such as catering or material rentals, the income may be classified as taxable UBI. Similarly, if the rental income is based on a percentage of the lessee's sales or profits, it will not qualify for exclusion from UBI.
The 85% rule is crucial in determining taxability. If a nonprofit uses at least 85% of its building space for its exempt purpose or core mission, the entire rental income is typically excluded from UBI, regardless of debt. However, if less than 85% of the space is used for the mission, a calculation is applied to determine the taxable portion of the rental income. This calculation considers the average debt on the property compared to its average value.
It is important to consult with a tax advisor specializing in nonprofits, as UBI rules can be intricate and vary from state to state.
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What to do if a nonprofit sends a 1099 but not a W-2
Nonprofit organizations typically have two types of professionals working for them: employees and contractors. Employees are on the organization's recurring payroll and have well-defined, consistent roles, while contractors provide specialized services on an as-needed basis. This distinction is crucial for tax purposes, as it determines whether a nonprofit should issue a W-2 or a 1099.
At the end of each year, nonprofits must provide their employees with a W-2 form to help them file their taxes. On the other hand, if a nonprofit has worked with contractors, it may need to issue them a 1099 instead. A 1099 is a tax form used to report income separate from wages, salaries, or tips. Nonprofits must issue a 1099 when they contract with individual workers or vendors to complete work for the organization.
There are two main types of 1099 forms relevant to nonprofits: Form 1099-NEC (Nonemployee Compensation) and Form 1099-MISC (Miscellaneous Information). Form 1099-NEC is typically used for independent contractors or freelancers, while Form 1099-MISC is used for other types of vendors. Nonprofits must generally issue a Form 1099-MISC if they pay a non-employee at least $600 during the year for services performed in the course of their business.
Now, let's address the scenario where a nonprofit sends a 1099 but not a W-2. In this case, it's important to understand the worker's classification. If the worker is an employee of the nonprofit, they should receive a W-2 form to help them file their taxes. If the worker is classified as an independent contractor, then the nonprofit would typically issue a 1099 form instead. Misclassification of workers can have significant tax and legal implications, so it's important to clarify the worker's status with the nonprofit organization.
If the worker is indeed an employee and should have received a W-2, the first step is to contact the nonprofit and inquire about the missing form. There may be a simple administrative error or delay in processing. It's important to verify the worker's employment status, payment details, and any other relevant information with the nonprofit. If the nonprofit refuses to provide a W-2 or correct the issue, the next step could be to contact the appropriate government agency, such as the state department of labor or the IRS, for guidance and assistance in resolving the matter. It's important to ensure that the worker's rights and benefits, such as minimum wage requirements, are upheld and that accurate tax reporting is maintained.
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Frequently asked questions
If your company rents property from a non-profit, you generally don't need to send them a 1099 form. However, if you pay for other services provided by a non-profit, you may need to file a Form 1099-MISC.
A 1099 form is a tax form used to prepare and file income information separate from wages, salaries, or tips. Non-profits need to issue this form when they hire contractors and freelancers.
A 1099-NEC (Nonemployee Compensation) is used for independent contractors or freelancers, while a 1099-MISC (Miscellaneous Information) is used for other types of vendors.
You need to issue a 1099 form when the payment recipient is not your employee and is an individual, partnership, vendor, or estate. Additionally, the payment must be at least $600 during the year.
