Key Points about IRS Forms W-2 and 1099

Q: What is the difference between IRS Forms W-2 and 1099, and what are some key issues for each form?

 

A: Both of these forms are frequently used by churches and other businesses to report compensation and wages.  In simple terms, one is used to report compensation paid to an employee, and one is used to report royalties, rent, or payments made to a person who is not an employee. However, each of these forms, called informational returns, serve different functions and have specific requirements for when they are used, and for whom they are used. 

 

 

IRS Form W-2, Wage and Tax Statement

According to the IRS, use the Form W-2 to:

1. Report wages, tips, and other compensation paid to an employee.

2. Report the employee's income and social security taxes withheld, and other information.

3. Report wage and withholding information to the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

 

Important Tip: The IRS Form W-4, Employee’s Withholding Allowance Certificate, is completed by employees to provide key information for the Form W-2, and to help identify the amount of taxes to be withheld from the employee’s paycheck.

Completing the W-2 for Ministers

When completing the IRS Form W-2, pay close attention to the special rules and exceptions that exist for ministerial staff.  For example:

.

• Properly include all wages and taxable income in box 1. This includes taxable fringe benefits.

• Ministers (as defined by the IRS) are exempt from federal tax withholding, but they may elect voluntary withholding of both income taxes and self-employment taxes like an employee. Box 2 of the W-2 should be blank unless the minister has elected voluntary withholding.

• Ministers are also treated as self-employed for social security purposes. Therefore, FICA and Medicare taxes are not withheld. Boxes 3 through 6 of the W-2 should be blank. A minister who is subject to self-employment tax and has not opted out of Social Security should report their own income from self-employment (taxable income plus housing) on Schedule SE of their personal federal income tax return.

• Ministers who receive a housing allowance or parsonage allowance may have the housing allowance amount reported in box 14 of the W-2, although this is not required. The housing allowance amount should not exceed the amount authorized by the board at the beginning of the year.

 

 

IRS Form 1099-NEC, Nonemployee Compensation or 1099-MISC, Miscellaneous Information

Certain payments made to non-employees must be reported on either IRS Form 1099-NEC or 1099-MISC, based on the type of compensation.  

 

According to the IRS, the 1099-NEC should be completed for each person to whom the church paid at least $600 during the year in:

1. Services performed by someone who is not your employee (including parts and materials).

2. Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.

3. Certain payments to an attorney.

 

In the past, these payments would have been reportable on 1099-MISC in box 7. However, starting in 2021, these payments are reported on the new 1099-NEC. 

It is important to note that there are still some payments to vendors that churches will still have to report on the 1099-MISC. However, the form has been redesigned and some box numbers have been rearranged, so be careful when filling it out.

For example, the 1099-MISC form should still be used for each person to whom the church has paid the following during the year:

1. At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.

2. At least $600 in:

   1. Rents (box 1);

   2. Prizes and awards (box 3);

   3. Other income payments (box 3);

   4. Any fishing boat proceeds (box 5);

   5. Medical and health care payments (box 6);

   6. Crop insurance proceeds (box 9);

   7. Certain payments to an attorney (box 10);

   8. Section 409A deferrals (box 12);

   9. Nonqualified deferred compensation (box 14).

 

You must also file Form 1099-NEC or 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

And remember, both of these 1099 forms are only required for business payments. Personal payments that individuals make to vendors and contractors do not apply. But since churches and nonprofits are considered to be engaged in a trade or business by the IRS, these 1099 forms will be required for most churches. 

Important Tip: The IRS Form W-9, Request for Taxpayer Identification Number and Certification, is completed by nonemployees to provide key information for the Forms 1099-NEC and 1099-MISC.

 

Penalties for an Incorrect Form

It’s very important to make sure income is reported properly and all required payroll forms are complete and timely.  

The IRS has significant fines and penalties for underreporting income and these penalties can directly affect the employee, the church, and the church leaders.  

For example:

• Failure to properly report taxable income on the Form W-2 could have significant consequences for the employee if the employee also fails to report the income.  Besides the unpaid taxes, the employee faces a 25% penalty and a 200% excise tax. 

• For the church, a failure to properly report income and withhold taxes can result in a penalty equal to 100% of the taxes not withheld or deposited.  

• Church leaders are also subject to penalties.  Organizational leaders, including board members, can face a 20% penalty up to $20,000, for failing to properly report income and withhold taxes. If the failure to withhold or deposit payroll taxes is willful, the officer or employee responsible can be charged with a felony, fines, and face up to 5 years’ imprisonment.

Similarly, the failure to file correct W-2 or 1099 forms can result in penalties of $50, $110, or $280 per form, based on the number of days late. While these penalties, indexed for inflation, do have a cap, they can exceed $1.1 million for a small business.  

 

Due Dates 

Each of these forms have different filing dates. For example: 

• The W-2 form must be provided to employees and filed with the Social Security Administration by January 31, whether using paper forms or electronically.

• The Form 1099-NEC is due on January 31, using either paper or electronic filing procedures. 

• The Form 1099-MISC is due by February 28, if you file on paper, or March 31, if you file electronically.

For additional information about these forms, see the following IRS resources:

• About Form W-2, Wage and Tax Statement
• About Form 1099-MISC, Miscellaneous Income
• About Form 1099-NEC, Nonemployee Compensation