The Internal Revenue Service categorizes 1099 tax forms as information returns. These forms aren’t tax returns; instead, they provide details about various financial transactions, from royalty payments to freelancer compensation. There are over 20 types of 1099 forms. Fortunately, most small business owners only need to worry about a few.
Failure to file tax returns with government agencies and send them to individual taxpayers can result in fines. Therefore, it’s crucial to understand who needs 1099s and which form to use. Explore the most common 1099 forms to learn which ones apply to your situation.
Reporting non-employee compensation on Form 1099-NEC
Previously, business owners used Form 1099-MISC to report compensation to freelancers, vendors, and contractors. Starting in 2020, the IRS instructed employers to use Form 1099-NEC (non-employee compensation). In most cases, you will need to issue a Form 1099-NEC if you paid any non-employee (individual, partnership, limited liability company, or estate) $600 or more to perform services (payment for which can include the cost of parts and materials) for your business.
Some situations require business owners to issue 1099s to corporations or LLCs that file as S or C corporations, as is the case with attorney fees. When in doubt, talk to your accountant or tax advisor to determine if you need to send 1099s.
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 received benefits.
- Professionals who received referral or fee-splitting fees.
- Non-employee entertainers for services related to your business.
- Certain people who got golden parachute payments after a merger or acquisition.
[Read more: The Difference Between Contract, Part-Time, and Full-Time Workers]
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 will show royalty payments ($10 or more) on a Form 1099-MISC. Farmers who rent out crop pasture use this form, as do organizations that buy or sell fish and other aquatic life. In these cases, the amounts should total $600 or more.
When in doubt, talk to your accountant or tax advisor to determine if you need to send 1099s.
Additionally, you will send a Form 1099-MISC to winners of prizes or rewards worth $600 or more. This doesn’t apply to employees or non-employees. Report prize amounts on a worker’s W-2 and place contractor bonuses, commissions, or awards on the 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.
Sending other types of 1099 forms
Depending on your business structure and industry, the IRS may require other forms of 1099s. These typically apply to financial institutions, brokers, and banks. For example, a credit union sends a Form 1099-INT to a customer who earned interest on their funds or a Form 1099-DIV to those who received dividends or distributions.
Creditors and lenders who cancel $600 or more of debt will send a Form 1099-C to their clients. Companies like PayPal, Etsy, and UpWork file 1099-K forms for each gig worker earning $600 or more on their platform. If your business sells items on one of these channels, you will receive a Form 1099-K, but in most cases, the forum will send 1099s to any freelancers who perform services for your company.
[Read more: Contract Worker Forms, Explained: From IRS Forms to Invoices]
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 services your private living spaces.
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).
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