If an individual earns over $600 a year from business-related incomes, not including their employer, the person or business that pays that amount must file a 1099 NEC. The 1099 NEC is to inform the IRS of the amount paid and to who it is paid. The IRS uses this method to know individuals who report their income.
This is a requirement on anyone that pays more than $600 to an individual that is not their employee for services performed. In addition, this report must be submitted to the IRS no later than the 31st of January the following year. And in some cases, you may have to withhold taxes from the amount you pay them.
If you pay an individual over $600 in a year, you are required to request the Form W9 from them. The form W9 allows the payee to provide their information to enable the payer to fill the 1099 NEC and submit it by the end of the year.
The Form W9 requests the SSN, EIN (Employer Identification Number), business number, address and any other detail required to complete the 1099 NEC. If the payee now disagrees with providing the details or filling out the Form W9, you are required to perform backup withholding.
The backup withholding involves withholding tax from the amount paid to that individual. The backup withholding is at a tax rate of 24%.
For example, if you are to pay $1,000 to an individual for building a website and they refuse to provide the Form W9, you are required to withhold 24% of the payment, which in this case is $240, after which you report and send it to the IRS.
To this end, if you are paying an individual that is not your employee over $600 in a year, you must request the Form W9 in order to file and report the 1099 NEC by the 31st of January, the following year. This is how to stay in compliance with the IRS. However, if they fail to provide the Form W9, you must withhold 24% of the amount.