If you regularly work with independent contractors or vendors, you’ll probably 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.
[Read more: How to Qualify for and Claim the R&D Tax Credit]
Reporting non-employee 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 (non-employee compensation). You’ll issue Form 1099-NEC if you paid any non-employee $600 or more to perform services for your business.
S corporations and C corporations are usually exempt from receiving Form 1099. But if you’re ever in doubt, it’s a good idea to talk to an accountant or tax advisor to determine whether you need to send a 1099.
The IRS provides the following examples of who should receive 1099s:
- Anyone who provided professional services, like accountants, engineers, or architects.
- Non-employee salespersons earning commissions.
- Independent contractors who get paid for services, goods, or travel or receive benefits.
- Professionals who received referral or fee-splitting fees.
- Non-employee entertainers for services related to your business.
- Individuals who got golden parachute payments after a merger or acquisition.
[Read more: A Complete Guide to Filing Your Business Taxes]
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 crop pastures and organizations that buy or sell fish and other aquatic life use this form as well.
You’ll also send Form 1099-MISC to winners of prizes or rewards worth $600 or more, though this doesn’t apply to employees or non-employees. 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.
If you’re ever in doubt, it’s a good idea to talk to an accountant or tax advisor to determine whether you need to send a 1099.
Situations that don’t require 1099s
You only need to send 1099s related to profit-making activities, not household or personal services. For instance, if you hire professional carpet cleaners for your office or rental unit, you will file Form 1099. But you won’t send one to the self-employed housekeeper who cleans your home.
The IRS lists other non-reportable activities, such as:
- Most payments to a corporation or an LLC treated as an S corporation.
- Rental payments to property managers or real estate agents.
- Charges for telephone, storage, merchandise, freight, or similar goods.
- Most payments to tax-exempt organizations.
- Any non-wage payments to employees (reportable 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 any recipients by January 31, but the filing deadline with the IRS is March 31.
How to handle 1099 errors or corrections
Making a mistake on Form 1099 is more common than you might think—it’s easy to use the wrong 1099 form type or file a 1099 for the wrong tax year. And you only have to submit a corrected form if you’ve already filed it with the IRS. Otherwise, you can simply void the form.
To send a corrected form, you’ll use a new 1099 form and mark the “Corrected” box at the top of the form. You’ll fill out the form with the correct information and send it to the recipient and the IRS as soon as possible. Make sure to keep records of the original and corrected forms.
[Read more: Contract Worker Forms, Explained: From IRS Forms to Invoices]
Digital tools for simplifying 1099 preparation and filing
Using digital tools is the best way to simplify the 1099 process and reduce the likelihood of errors. Here are a few software options you can use to manage your 1099 preparation and filing:
- QuickBooks: QuickBooks is the best option for small and growing businesses. The software automatically tracks any payments made to vendors and contractors and will generate Forms 1099-NEC and 1099-MISC. 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 filing option for tax forms. The software integrates with most popular accounting software and automates TIN verification to reduce the likelihood of IRS penalties.
[Read more: What Is a 1099-K Tax Form?]
Jessica Elliott contributed to this article.
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