If you regularly work with independent contractors or vendors, you’ll need to send them Form 1099 at the beginning of the year. There are over 20 types of 1099 forms, but fortunately, most small business owners only need to worry about a few. Failure to file these forms and send them to taxpayers can result in fines, so it’s important to understand how Form 1099 works.
What is a 1099 form, and why does it matter for small businesses?
Form 1099 is a tax document businesses use to report payments made to nonemployees. These forms help the IRS verify that those individuals reported that income on their tax returns. Small businesses commonly issue Form 1099-NEC to independent contractors, freelancers, and other service providers.
Issuing the correct 1099 forms on time helps your business comply with IRS reporting requirements and avoid fines and penalties. Having contractors fill out Form W-9 before you pay them can make the filing process much easier come tax season.
Reporting nonemployee compensation on Form 1099-NEC
Compensation paid to contractors and vendors used to be reported on Form 1099-MISC. Then in 2020, the IRS introduced Form 1099-NEC (nonemployee compensation). You’ll issue Form 1099-NEC if you paid any nonemployee $2,000 or more during the calendar year to perform services for your business.
You don’t usually need to issue 1099s to S corporations or C corporations, with a few notable exceptions, like attorney payments or certain healthcare payments. If you’re ever in doubt, it’s a good idea to talk to an accountant or tax adviser to determine whether you need to send a 1099.
The IRS provides the following examples of who should receive 1099s:
- Independent contractors.
- Freelance accountants, engineers, or architects.
- Commission-based salespeople.
- Entertainers hired for business events.
- Professionals receiving referral fees.
You only have to send 1099s for qualified business payments, not personal expenses.
Understanding Form 1099-MISC requirements
Although less common, businesses in certain industries may use Form 1099-MISC to report specific types of payments. For instance, if you purchased a patent from an individual or company, you’ll show royalty payments of $10 or more on Form 1099-MISC. Farmers who rent out their crop pastures and organizations that buy or sell fish and other aquatic life, for instance, would use this form as well.
You’ll also send Form 1099-MISC to winners of prizes or rewards worth $2,000 or more, though this rule doesn’t apply to employees or nonemployees. You’ll report prize earnings on a worker’s W-2 and contractor bonuses, commissions, or awards on Form 1099-NEC. Business owners reporting $5,000 or more of sales of consumer products on a commission basis may use Form 1099-MISC or Form 1099-NEC.
Different rules exist for foreign agricultural workers, coin-operated amusements, and certain punitive damages and awards. The IRS has separate publications for each circumstance, so review all information carefully before deciding who gets 1099s.
Situations that don’t require 1099s
You only have to send 1099s for qualified business payments, not personal expenses. For example, if you hire professional carpet cleaners for your office or rental unit, you’ll file Form 1099. But you won’t send one to the self-employed housekeeper who cleans your home since that work isn’t related to your business.
The IRS states that you don’t usually need to issue a Form 1099 for:
- Most payments to a corporation or an LLC treated as an S corporation, though certain exceptions apply.
- Payments made by credit card, debit card, or through third-party payment networks like PayPal or Venmo. These transactions are typically reported by the payment processor on Form 1099-K.
- Rental payments to property managers or real estate agents.
- Payments for merchandise, freight, storage, telephone services, or similar goods.
- Most payments made to tax-exempt organizations.
- Wages and other compensation paid to employees, which are reported on Form W-2.
Deadlines for sending 1099 forms and filing with the IRS
You must file Form 1099-NEC with the IRS and send a copy to all recipients by January 31. If you’re filing fewer than 10 forms, you can file them by mail or electronically. If you’re filing more than 10 forms, they must be filed electronically. Form 1099-MISC must be sent to recipients by January 31, but the filing deadline with the IRS is February 28 if you’re filing manually and March 31 if you’re filing electronically.
How to handle 1099 errors or corrections
Mistakes on Form 1099 are more common than you might think. It’s easy to use the wrong 1099 form, enter an incorrect taxpayer identification number (TIN), or file for the wrong tax year. If you catch the mistake after you’ve already filed the form, you’ll need to submit a corrected 1099.
Complete a new form with the correct information, check the “Corrected” box at the top, and send it to the IRS and the recipient as soon as possible. Fixing the error immediately can reduce the risk of IRS notices or penalties. Keep copies of the original and corrected forms for your business tax records.
Digital tools for simplifying 1099 preparation and filing
Using digital tools greatly simplifies the preparation and filing process, and it reduces the likelihood of errors. Here are a few software options to manage 1099 preparation and filing:
- QuickBooks: QuickBooks is the best option for small and growing businesses. The software automatically tracks payments made to vendors and contractors and will generate 1099-NEC and 1099-MISC forms. You can also e-file these forms directly with the IRS.
- Gusto: Gusto allows you to automate your payroll and 1099 filings. The software generates 1099s for contractors and W-2s for employees, and you can e-file them with the IRS.
- Tax1099: Tax1099 is the best option for businesses that need a bulk tax-filing option. The software integrates with most popular accounting software programs and automates TIN verification to reduce the likelihood of incurring IRS penalties.
What happens if you miss a 1099?
Failing to file a 1099 or sending it after the deadline can result in IRS penalties. The IRS charges the following fines for each return you file late:
- Up to 30 days late: $60
- 31 days late through August 31: $130
- After August 31 or not filed: $340
- Intentional disregard: $680
The IRS also charges interest on penalties, though the interest varies depending on the amount and penalty type. If you can show reasonable cause as to why you missed the deadline, the IRS may remove or reduce the penalty. So if you realize you missed a filing deadline, don’t ignore it. File the missing 1099 as soon as possible and send a copy to the recipient.
You can avoid missed 1099s by tracking eligible payments throughout the year and reviewing your records before the January filing deadline. Using accounting or payroll software can also help you automate the process and reduce the risk of errors.
Jessica Elliott contributed to this article.
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