One of the purposes of 1099 forms is to help the government measure the tax gap. Basically, who is paying income taxes on their income and who isn't. However, 1099 forms remain one of the most misunderstood responsibilities imposed on business owners by the Internal Revenue Service (IRS). There's good reason too; the rules are complex, and over the past few years the rules have increased in complexity with the introduction of form 1099-NEC. Additionally, depending on a vendors entity type, some are required to receive a 1099 and some are not.
The IRS has recently increased compliance efforts regarding 1099 forms and backup withholding requirements. That's right, if a vendor doesn't provide you with a W-9 or you don't obtain one, you may be required to withhold tax at a rate of 24% and remit it to the IRS using form 945.
In this article, we wanted to provide some general information about 1099 forms, as well as best practices, to help entrepreneurs better prepare going forward.
What is Form 1099-MISC?
At one time, businesses were to issue an IRS Form 1099-MISC to each vendor or independent contractor they paid $600 or more in services (including parts and materials), prizes and awards, rents, or other income payments. The form was to identify the nonemployee income paid to people or unincorporated entities that provided services to the business throughout the year.
Beginning in the tax year 2020, the purpose of the 1099-MISC form changed slightly. While it still must be used for documenting rents, prizes and awards, and some other types of payments totaling at least $600 and royalties of $10 or more, a 1099-MISC is no longer used for compensation paid to vendors for their services. Businesses must now issue Form 1099-NEC (Nonemployee Compensation) for that purpose.
What is Form 1099-NEC?
The IRS requires businesses to file a 1099-NEC form for each person to whom they have paid at least $600 during the year for any of the following:
Services performed by someone who is not an employee (including parts and materials)
Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish
Payments to an attorney
Also, a business must file Form 1099-NEC for each person from whom they withheld any federal income tax (in any amount) under the backup withholding rules.
Who Do I Need to Send Form 1099-NEC to?
If a business pays more than $600 to a vendor or independent contractor, it must send Form 1099-NEC stating the amount paid to the individual, Partnership, Limited Liability Company, Limited Partnership or estate throughout the year. Basically, anyone who worked for the company other than its employees and owners will need a 1099-NEC from the business.
Examples of people to whom businesses may have to send a 1099-NEC include:
Freelance creatives (e.g., writers, graphic designers, photographers, etc.)
Professional service providers (e.g., consultants, lawyers, accountants, tax advisors, etc.)
Vendors operating as sole proprietors (e.g., caterers, computer repair technicians, business remodeling contractors, etc.)
Important Update Beginning With Tax Year 2022:
Beginning with tax year 2022, credit card companies and payment apps (such as PayPal, Venmo, and CashApp) must send 1099-K forms to self-employed individuals and small businesses that received payments totaling $600 or more through their platforms.
Previously, those companies were only required to report payments to the IRS when an account received more than $20,000 and had 200 or more transactions during the year.
This change opens the door to some potential tax reporting issues and confusion as independent contractors might receive both a 1099-K from a payment platform AND a 1099-NEC from a client for the same income.
What Exceptions Exist Where Issuing a 1099 Isn't Required?
The list is rather long, but most commonly, these types of vendors do not get 1099-MISC or 1099-NEC forms:
Those businesses with sub-chapter S corporation or C corporation entity structures
Limited Liability Companies (LLCs) that are taxed as sub-chapter S corporation or C corporation entities
Companies that sell merchandise, storage, freight, or other similar things
Best Practice.
Business owners should require all vendors to provide a completed W-9 form before allowing them to perform work. The W-9 contains all the information needed about the vendor for filing purposes. It supplies the vendor’s mailing information, tax ID number, and business structure. If a vendor has incorporated their company or has elected for S Corporation or C Corporation tax treatment, a 1099 shouldn’t be necessary.
What is the Deadline for Issuing 1099s?
Generally, the deadline for sending 1099-MISC and 1099-NEC forms to contractors is January 31 each year. Businesses must also submit copies of their 1099 forms for each vendor to the IRS. The IRS filing due date for 1099-NEC is January 31. The IRS filing due date for 1099-MISC is February 28 (if filing by paper) or March 31 (if filing electronically).
If sending paper copies of 1099 forms by mail to the IRS, businesses must also submit Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) with their filing. It’s also critical to check the state’s tax filing rules. Some states require they also receive a business’s 1099s.
What Happens if You Miss the Filing Deadline?
Sending the required 1099-MISC or 1099-NEC forms late (or not at all) could cost you. The penalties currently vary from $50 to $280 (increasing to $290 in 2023) depending on how far past the deadline the filing is. If a business gets caught intentionally not providing a payee with a correct statement for the tax year, the “intentional disregard” penalty is $570 (increasing to $580 in the tax year 2023).
Click here for more information or consult your tax advisor about your responsibilities regarding 1099 forms.