Confused by Form 1099?
Everything You Need to Know about Form 1099-MISC and 1099-NEC
If you’ve ever been confused about whether or not you need to issue a 1099 to one of your vendors, you’re not alone! The rules about who gets them can get complicated. And depending on who you talk to, you might hear different opinions. I know it’s hard to believe, but the IRS doesn’t make it easy to stay in compliance sometimes. Shocker! I’ve been helping clients prepare 1099’s for years, and sometimes I still have to refer back to the instructions for certain situations. The season for filing 1099’s is right around the corner, so I thought now was the perfect time to do a post to help de-mystify 1099’s and give you some tools to make it easier.
Effective for tax year 2020, the IRS decided to make 1099’s even more fun by splitting them into two forms - 1099-MISC and 1099-NEC. The new 1099-NEC is for reporting Non-Employee Compensation (NEC). In general, these are the amounts paid for services provided by independent contractors, and they used to be reported in box 7 on the 1099-MISC. All other payments remain on the 1099-MISC, although the form did change a bit to move the boxes around. Most small businesses will be issuing the new 1099-NEC, and will only need to issue a 1099-MISC if you had reportable rent payments, but we’ll cover the details below.
What is a 1099 and why do I care about them?
A form 1099, is the form that businesses file with the IRS to report amounts paid to certain vendors. It’s the IRS’s way of helping to keep people honest when they are reporting their income for tax purposes. If the IRS receives 1099’s saying you received $50,000 in income, but you only reported $20,000 on your tax return, they are going to be sending you a notice. Also, if you as a business owner are supposed to file 1099’s and don’t, and the IRS finds out, there are penalties ranging from $50 up to $530 per form. In general, 1099’s are issued to vendors that provide services for your business, such as a bookkeeper, virtual assistant, business coach, copywriter, etc. Purchases of products and reimbursements are not reported. So if you have consultants that you work with in your business you may need to issue them a 1099 at the end of the year.
What types of payments are included on 1099’s?
For most businesses, the most common payments that are reported on 1099’s are rents, services performed by contractors, and payments to attorneys. Payments are only reportable if the total amount paid is greater than $600 for the calendar year. So if you paid a VA $500 during 2020, you wouldn’t need to report it since it was under $600. See below for the complete list of reportable payments per the 1099 instructions:
You must file a 1099-NEC for each person to whom you have paid during the year:
at least $600 in:
services performed by someone who is not your employee (box 1);
cash payments for fish you purchase from anyone engaged in the trade or business of catching fish (box 1); or
payments to an attorney for attorney fees (box 1).
You must file a 1099-MISC for each person to whom you have paid during the year:
at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
at least $600 in:
rents (box 1);
prizes and awards (box 3);
other income payments (box 3);
generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3);
any fishing boat proceeds (box 5);
medical and health care payments (box 6);
crop insurance proceeds (box 9);
gross proceeds paid to an attorney (box 10);
section 409A deferrals (box 12); or
nonqualified deferred compensation (box 14).
In addition, use this form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Who do I have to send a 1099 to?
In general, payments made to a corporation (including an LLC that is treated as a C or S Corporation) are excluded from being reported. The most common exception to that is amounts paid to attorneys for fees and gross proceeds – there are a few others, but they are less common. So if you paid the accounting firm Dewey, Cheatum & Howe, Inc. $2,000 for preparing your tax return, you would NOT be required to report it on a 1099 since they are a corporation. But if you paid Sally Snape $1,500 to manage your social media, you may need to issue her a 1099 (keep reading).
What if I paid the vendor by credit card/debit card?
If payment was made to a vendor that would otherwise qualify for reporting (paid over $600 for services and they aren’t a corporation) but you paid them via credit card/debit card or other payment processor (i.e. PayPal) then you do not need to include those amounts on the 1099. Note: Services like Venmo are not considered a payment processor unless the vendor is using a business Venmo account or the payment is marked as being for goods and services. So payments made to a personal Venmo account, and other services that facilitate ACH type bank transfers, would need to be reported on 1099’s.
What if they did the work in December by I didn’t pay them until January?
The forms are prepared on a cash basis, so payments are reported when they are made not when the work was done, or when you got the bill, it’s when you wrote the check that matters.
What information do I need to include on the 1099?
In order to prepare the 1099 for your vendors, you will need their legal name and address, their taxpayer ID# (social security number if they are an individual or EIN if they are a business entity), and the total amount you paid them during the year. When you first make a payment to a vendor that may be reportable on a 1099, you should request a Form W-9 to get their taxpayer ID# and information about what type of entity they are. You can get the form here – Form W-9 – IRS Website It is much easier to get the information throughout the year, and preferably before you send them payment, so that you have everything you need and aren’t scrambling at the end of the year. Vendors are much more motivated to submit the form if you owe them money than they are after the fact.
How do I file 1099’s?
There are several ways you can file 1099’s. You can purchase the paper forms at your local office supply store, or order them online. The forms sent to the IRS are special forms with red ink, so you can’t just print them off the internet. If you buy the paper forms, you’ll need a way to print the information on the forms, unless you happen to have a typewriter lying around. I don’t recommend handwriting them as I’ve seen issues with the IRS reading the information incorrectly which results in notices from the IRS, nobody wants that. If you use an accounting system like QuickBooks, you can use it to print the information onto the forms. Also, if you are using the paper forms, you’ll need to complete a Form 1096 transmittal form, they usually include one or two in the package of 1099’s if you buy them at an office supply store.
I prefer to use an online service to prepare and file 1099’s, it’s so much easier than dealing with the paper forms. There are several available, but the ones I recommend are Track1099 or Tax1099. Both will allow you to send the forms to recipients electronically, if you have their e-mail (saves you a stamp), or you can print and mail them, or you can have them mail them for you, for a fee. Also, they will electronically file the forms with the IRS. The pricing is very reasonable and is dependent on the number of forms you file. For the ease and convenience, it is well worth the price! You can also use these services to collect W-9’s electronically during the year. And if you’re using an accounting system like QuickBooks you can import the information for your vendors to save the manual entry.
When do I need to file 1099’s?
The forms 1099-NEC are due to both the IRS and the recipient by January 31, 2023. Forms 1099-MISC are due to the recipients by January 31, 2023 and to the IRS by February 28, 2023 if you file on paper, or March 31, 2023 if you file electronically. There are penalties for filing them late, so be sure to get them submitted on time!
Please keep in mind that I have covered the most common scenarios for small businesses above. If you have a complicated situation, or aren’t sure about something, please refer to the 1099 Instructions or talk with your accountant.
