When a company hires an employee, it files a W-2 with the IRS and shows information about the income paid to the employee, the amount of taxes withheld, and the benefits provided.
But when businesses or self-employed individuals make non-employment payments, the IRS may require them to report those payments on a 1099 and send a copy to the payee. Payors of 1099s need to know when they are required to file a 1099 and when they are not.
What is IRS Form 1099?
IRS Form 1099, commonly called a 1099, is the IRS form used to report non-employment income. You might receive money as an independent contractor, dividends from stock you own, interest income, retirement income account payouts, or other non-employer payments.
The person or company sending you the money is responsible for filing a 1099 with the IRS and sending you a copy to file with your tax return. Since there are many different types of payments, the IRS has various 1099 forms.
Form 1099-MISC vs. Form 1099-NEC
Form 1099-MISC and Form 1099-NEC are similar but have one main difference. A business uses Form 1099-NEC when it reports non-employee compensation.
When the business reports other income, such as rents, royalties, prizes, or awards paid to third parties, it uses Form 1099-MISC.
If you are self-employed and provide services of at least $600 to a business during the year, you should receive Form 1099-NEC.
So as a freelancer, or independent contractor doing work for a business, you get a Form 1099-NEC. But this is not what happens when you do work for an individual that is not in a trade or business.
For example, you are a self-employed handyman. You did work for your neighbor and made repairs of $1,000. If your neighbor is not a business or trade and your services were for their personal purposes only, your neighbor does not need to provide you with a Form 1099-NEC. But you still need to report the income on your self-employed tax return.
But what if you do handyman work for your neighbor’s business, Main Street Realty, LLC, and the business pays you $5,000? Then the company must file Form 1099-NEC with the IRS since your payment is above the IRS $600 threshold. And they must send you a copy also.
When Am I Required to Issue a 1099?
You are required to issue a 1099 when your business makes payments of $600 or more during the tax year to an independent contractor or freelancer.
1. What was the purpose of the payment?
To be required to issue a 1099, the purpose of the payment must be for business or trade. If you, as an individual, are paying for non-business services or goods, you do not have to issue a 1099.
2. Who were you paying?
You issue 1099s to vendors who do work for your business during the tax year. The contractor must be a partnership or individual. You do not issue 1099s to vendor corporations.
3. What was the method of payment?
You do not need to issue a 1099-NEC or 1099-MISC for credit card payments as listed below.
- Credit cards
- Debit cards
- Store-valued cards
- Mobile wallets (e.g., PayPal)
However, you must issue a 1099-NEC or 1099-MISC if you pay your contractor or freelancer with cash or by check.
4. What was the payment amount?
You must issue a 1099 when you pay a vendor more than $600 for the year. If your total payments are less than $600 for the year, no 1099 is required.
When Am I Not Required to Issue a 1099?
If your business pays a contractor or freelancer more than $600, you are most likely required to file a Form 1099. But the IRS lists several exceptions to this general rule, including how much you paid and whether you are in a trade or business.
1. Personal payments
If you make payments personally and not for your business, you are not required to send a Form 1099-MISC. The key is that these must be personal payments and not business payments. So if you are paying your babysitter, gardener, or painter, you do not have to file a 1099.
2. Payments to corporations
When you pay a corporation, you are not required to send it a 1099. S-corporations and C-corporations do not need 1099s. 1099s need to be issued to single-member LLCs, partnerships, sole proprietors, unincorporated contractors, and freelancers if you paid them more than the yearly threshhold.
3. Payments of less than $600
If you paid a freelancer or independent contractor less than a total of $600 for the year, you are not required to send them a 1099.
4. Payments to freelancers hired through third-party services
When you hire a freelancer through a third-party service, you are not required to send a 1099. For example, when you hire a writer through UpWork or an artist through Fiverr, you pay the service, and the service pays the freelancer. Those platforms supply the required information to the IRS.
As another example, Uber has more than one million drivers in the US. You pay Uber and pay the independent driver. You do not file 1099s for Uber drivers. Uber files the necessary information returns to the IRS.
5. Employee business expense reimbursements
Reimbursement to contractors is very common. Often they must spend their money on your behalf while doing work for you. When you reimburse them for those expenses, it is not income, and you are not required to file a 1099.
6. Foreign workers
If you hire a non-U.S. citizen and they work for you inside the US, you must file a 1099-NEC, assuming the transaction meets the other filing requirements. However, if they perform all of their work outside the US, you are not required to issue the 1099-NEC. But it is your responsibility to verify the information.
Other 1099 Examples
1099s are used to report other types of income. You might sell stocks at a profit, earn interest from an account, get dividends from a company, receive distributions from a retirement account, and more. The IRS has a variety of 1099 forms to cover all of these and other scenarios.
Form 1099-B
If you use a broker to sell stocks, bonds, or other securities, they will send you Form 1099-B to report gains or losses from your transactions in the preceding year. If you use a barter network, you should receive one from them, also.
Form 1099-C
When a lender cancels your debt, you no longer owe any money to the lender. But, the IRS counts that amount as income to you, and the lender will send you a Form 1099-C with the amount of debt cancelation.
Form 1099-CAP
When corporations undergo substantial change or ownership control, sometimes, they send the stockholders cash, stock, or other property as part of the restructuring. When this happens, they report the income on Form 1099-CAP.
Form 1099-DIV
Banks and other financial institutions report dividends and other distributions to their clients on Form 1099-DIV.
Form 1099-INT
Form 1099-INT reports information to the IRS when companies pay dividends or interest.
Form 1099-K
Credit card companies, online platforms, and third-party payment processors must send 1099-K forms to report payments they process during the year for merchants.
Form 1099-R
Form 1099-R reports the distribution of $10 or more of retirement benefits from pensions, annuities, or other retirement plans.
Form 1099-S
Form 1099-S reports the sale or exchange of real estate.
Worker Classification: Employee or Contractor
The main difference between an employee and an independent contractor is that one is a payroll worker, and the other is a non-payroll worker. Suppose you are in business for yourself and provide services to other companies or people. In that case, you are probably an independent contractor.
For example, imagine you are a business that hires others to help provide your services. In that case, you must determine if they are employees or independent contractors. The IRS has a series of thresholds determining whether someone is an employee or an independent contractor.
There are three main categories.
- Behavioral control − Does the company control the worker and how they do their job?
- Financial control − Does the worker determine their pay or bid for the work? Or does the company directly control financial components like pay per hour, whether expenses are reimbursed, and how many hours per week?
- Relationship control − Does the company provide employee-type benefits like pension plans, insurance, and vacation pay?
As an employee, your employer will file a W-2 which reports your income and withholdings for Social Security FICA, Medicare, and more. It also reports your employer contributions to things like the Social Security tax.
A 1099 for independent contractors has no employee benefits or employer contributions. It reports the income paid to the independent contractor or freelancer.
Penalties for Not Sending 1099 Forms
If a business fails to timely issue a 1099, the IRS can impose penalties.
For a failure to issue a 1099-NEC or 1099-MISC, the IRS penalty varies from $50 to $270 per form. The penalty amount depends on how long past the deadline the business issues the form. For small businesses, the maximum fine is $556,500 per year.
Suppose a business intentionally disregards the requirement of providing a correct payee statement. In that case, the penalty is a minimum of $550 per form or 10% of the reported income, with no maximum.
Penalties for Late Filings of 1099 Forms
If a business fails to timely issue a 1099, the IRS can impose penalties.
For a failure to issue a 1099-NEC or 1099-MISC, the IRS penalty varies from $50 to $270 per form. The penalty amount depends on how long past the deadline the business issues the form. For small businesses, the maximum fine is $556,500 per year.
Suppose a business intentionally disregards the requirement of providing a correct payee statement. In that case, the penalty is a minimum of $550 per form or 10% of the reported income, with no maximum.
When the W-9 Is Your Best Friend
Sometimes business owners can be frustrated because they do not have enough information to issue a 1099. But since there are potential penalties for failing to issue and file a 1099, what should a business owner do?
Form W-9 has been described as the employer’s “best friend” because it calls for the vendor to supply the information the employer needs.
If you plan to use a vendor and pay them more than $600 in the year, the best business practice is to have them fill out a W-9 before doing any business with them.
This will ensure that you have the vendor’s mailing information, Tax ID number and also require them to indicate their corporate status.
Deadlines for Issuing 1099 Forms
There are different types of 1099s, and they do not all have the same filing date.
And there are three different deadlines for each form, namely the
- Recipient Deadline
- Paper Filing Deadline
- E-Filing Deadline
For example, for a 1099-NEC form filed in 2022, all of the deadlines were 1/31/2022.
But for a 1099-MISC form (with no data in Boxes 8 or 10), the recipient deadline was 1/31/2022, the paper filing deadline was 2/28/2022, and the e-filing deadline was 3/31/2022.
Fortunately, the IRS always provides the dates in General Instructions for Certain Information Returns.
What About Backup Withholding?
1099s are information returns, and often the person or company filing them does not withhold taxes from these types of payments.
However, the IRS does require backup withholding for some types of payments at the current rate of 24%.
Examples of payments requiring backup withholding are:
- Attorney’s fees (Form 1099-NEC)
- Interest payments (Form 1099-INT)
- Dividends (Form 1099-DIV)
- Payment Card and Third Party Network Transactions (Form 1099-K)
- Rents, profits, or other gains (Form 1099-MISC)
- Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-NEC)
- Payments by brokers/barter exchanges (Form 1099-B)
Payments excluded from backup withholding are::
- Real estate transactions
- Foreclosures and abandonments
- Canceled debts
- Distributions from Archer MSAs
- Long-term care benefits
- Distributions from any retirement account
- Distributions from an employee stock ownership plan
FAQs
Here are the answers to some common questions about when 1099s are required to be issued.
As a personal payment from you to the handyman, you are not required to issue a 1099.
The IRS penalty for failing to issue a 1099 is now $250 per form.
Employers can be subject to an IRS fine of $50 or higher for failure to give you a 1099.
Many types of payments are exempt from needing a 1099, including personal payments and total payments to a vendor under $600 for the year.
One new rule in 2022 is that companies like Zelle and Venmo will send you a 1099-K if you receive more than $600 through the platform for the year.
Yes. The 1099 is issued to the payee and also sent to the IRS.
