1099-NEC Filing Requirements in California
Navigate California's unique 1099-NEC requirements, from correctly classifying workers to meeting both state and federal tax reporting obligations.
Form 1099-NEC, Nonemployee Compensation, is a tax information return used by businesses to report payments made to independent contractors. This form provides payment information to the Internal Revenue Service (IRS) for services rendered during a tax year.
Determining Who Needs a Form 1099-NEC in California
A business must issue a Form 1099-NEC when it pays $600 or more during a calendar year to a non-incorporated service provider. This federal threshold applies to payments for services performed by individuals, partnerships, and other entities not classified as corporations. Payments of $600 or more made to attorneys or law firms must be reported, even if the firm is incorporated. In California, the filing requirement hinges on the correct classification of a worker.
California’s Assembly Bill 5 (AB 5) established the “ABC test” to determine a worker’s status. To classify a worker as an independent contractor, a business must demonstrate that all three of the following conditions are met:
- The worker is free from the control and direction of the hiring entity regarding the performance of the work.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If a worker does not satisfy all three conditions, they are considered an employee, and their compensation must be reported on Form W-2.
Information and Forms Needed for Filing
To prepare for filing, a business must gather specific information from each recipient, including their full legal name, current address, and Taxpayer Identification Number (TIN). A TIN can be a Social Security Number (SSN) for an individual or an Employer Identification Number (EIN) for a business entity.
The standard method for collecting this data is by having the contractor complete IRS Form W-9, “Request for Taxpayer Identification Number and Certification.” This form documents the recipient’s information and includes a certification that it is correct. Businesses should obtain a completed W-9 from any contractor before issuing payment to ensure they have the necessary details for reporting.
Once the W-9 is secured, the business must obtain official, scannable copies of Form 1099-NEC. The IRS does not accept photocopies or forms printed from its website for submission; official red-ink versions must be used. These can be ordered from the IRS or purchased from office supply stores.
The Filing Process for California Businesses
A business must send Copy A of Form 1099-NEC to the IRS and provide Copy B to the independent contractor by January 31 of the year following payment. While businesses can mail returns, electronic filing is required for those filing 10 or more information returns of any type, including Forms W-2 and 1099, in a calendar year.
California’s Franchise Tax Board (FTB) also requires 1099-NEC information. Businesses filing electronically with the IRS can often satisfy the state requirement through the Combined Federal/State Filing (CF/SF) Program, which forwards the data to the FTB. The state filing deadline is March 31. Additionally, California businesses must file a Form DE 542, Report of Independent Contractor(s), with the Employment Development Department (EDD) within 20 days of making payments totaling $600 or more or entering into a contract for that amount.
State and Federal Penalties for Non-Compliance
Failure to comply with filing requirements can result in financial penalties from both the IRS and California’s Franchise Tax Board (FTB). The IRS imposes penalties for failing to file a correct information return by the due date, with the amount based on when the form is eventually filed. These penalties can range from $60 to several hundred dollars per form, with a higher penalty for intentional disregard that has no maximum.
The California FTB also imposes its own set of penalties for failure to file correct information returns, which mirror the federal structure. Penalties can also be assessed for failing to report independent contractor information to the Employment Development Department (EDD) on Form DE 542.