Every year when tax time rolls around, many business owners wonder whether they must send 1099s to their vendors. As commonly known as 1099 forms are, they remain one of the most misunderstood Internal Revenue Service (IRS) requirements. Recently, more confusion has surfaced as the IRS changed the type of 1099 form used for reporting nonemployee compensation to vendors.
To help entrepreneurs understand the circumstances under which the IRS requires issuing 1099 forms, I will provide some basic “must-know” information here. I encourage business owners to speak with their accountant or other tax professional for guidance on what they must do in their specific situation.
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.
To Whom Do You Need to Send a Form 1099-NEC?
If a business pays more than $600 to a vendor or independent contractor, it must send Form 1099-NEC to document what it paid the individual, Partnership, Limited Liability Company, Limited Partnership, or estate throughout the year. Basically, anyone who worked for the company other than its payrolled 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.)
Another Important 1099 Change:
Beginning with the 2022 tax year, 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.
For example, imagine ABC Building Supplies, Inc. paid a freelance graphic designer $1,000 during the year via PayPal. At tax time, PayPal issued a 1099-K to the designer and ABC Building Supplies issued a 1099-NEC. The designer will have to pay close attention when reporting their income on their tax return so that they don’t double-report their income. In other words, they only made $1,000 from the client, so that’s the total they should report. If they fail to notice that their 1099-K and 1099-NEC represent the same income, they might accidentally report $2,000 a potentially costly mistake that would increase their income tax obligation.
Are There Any Exceptions When a 1099 Isn’t Necessary?
There are. The list is rather long, but most commonly, these types of vendors do not get 1099-MISC or 1099-NEC forms:
- Those businesses with S Corporation or C Corporation entity structures
- Limited Liability Companies (LLCs) that are taxed as C Corporations or S Corporations
- Companies that sell merchandise, storage, freight, or other similar things
How Do You Figure Out if a Vendor Needs a 1099 Form from You?
Business owners should ask vendors to provide a completed W-9 form before the individual works for their company. The W-9 contains all the information needed about the vendor for filing taxes. 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.
When is the Deadline to Send 1099s?
The deadline may vary slightly each year depending on how the day of the week dates fall on the calendar. Generally, the deadline for sending 1099-MISC and 1099-NEC forms to contractors is January 31. Businesses must also submit copies of their 1099 forms for each vendor to the IRS. IRS filing due date for 1099-NEC is January 31. 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 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).
Where Can You Get 1099 Forms?
Business owners can request 1099-MISC and 1099-NEC forms via the IRS website to receive them by mail. Alternatively, they can call the IRS at 800-829-3676 to place an order.
Eliminate Headaches and Stay Educated!
Whether you’re in the early stages of launching a startup or already running a small business, it’s essential to understand the rules and requirements of reporting payments to self-employed individuals. Tax laws and processes change over time, so it’s helpful to look for updates on the IRS website and talk with a tax professional who can share more details about your specific filing requirements and obligations.
