If you work with independent contractors, knowing when, why, and how to issue a 1099 is an integral part of your business. Forgetting or mishandling this crucial step will eventually lead to fines from the IRS.
To ensure that your business is compliant, here are the key points to remember when it comes to issuing 1099s:
Before we dive into the specifics, let’s clarify what a 1099 form is. A 1099 is an information return used to report various types of income other than wages, salaries, and tips to the IRS. Businesses send them to individuals who are not employees.
The most common types of 1099 forms include:
- 1099-NEC: This form is used to report payments of $600 or more made to independent contractors, freelancers, and other non-employees for services rendered during the tax year.
- 1099-MISC: Historically, this form was used to report similar payments, but as of tax year 2020, the IRS introduced the 1099-NEC to separate non-employee compensation from other miscellaneous payments. However, 1099-MISC is still used to report other types of income, such as rent and royalties.
When to Issue 1099s
Typically, the deadline for sending 1099 forms to recipients is January 31st of the following tax year. For example, if you made payments that require a 1099-NEC for the 2023 tax year, you must provide the form to the recipient by January 31, 2024.
The deadline is extended to the following Monday if January 31 falls on a weekend.
You must also provide a copy of the 1099 to the IRS. 1099-NEC forms are due by January 31, while 1099-MISC forms are due by February 28 if filing by paper or March 31 if filing electronically.
Who Needs a 1099?
It’s important to note that, even if you think someone is an employee, they may be classified as an independent contractor depending on their work arrangement. To make sure you’re reporting accurately and compliant with the IRS requirements, consult a professional firm like Kondler & Associates, CPAs. We can help you decide which form should be used.
Here’s who else needs a 1099:
- Attorneys: Payments of $600 or more to attorneys for legal services should be reported using a 1099-NEC, even if they are incorporated.
- Landlords: If you paid at least $600 in rent to someone who is not your employee, you should issue a 1099-MISC to report these payments. This could include rent for office space, equipment, or other assets.
- Award Recipients: Prizes, awards, and other miscellaneous income payments over $600 should be reported using a 1099-MISC.
Who Does NOT Need a 1099?
Not all payments made to third parties must be reported on 1099s. You do not have to report payments made to:
- Freelancers paid via third-party platforms like PayPal and Fiverr
- Vendors who sell products without services attached
- Contractors paid by credit card
- Foreign contractors who worked online or outside the U.S.
1099 Penalties: What to Expect
Not filing or sending the correct forms on time can lead to severe IRS penalties. The penalty amount is determined by how many days late the forms are filed, with an initial minimum penalty of $50 for each 1099 form.
Non-compliance with 1099 reporting requirements can also trigger IRS audits, and failing to file can lead to civil or criminal penalties. Make sure to track payments made throughout the year and get help from a professional accounting firm like Kondler & Associates if needed.
The bottom line is that 1099s are an important part of running a business — but there’s no need to stress about it. With the right knowledge and preparation, you can stay compliant with IRS regulations and avoid penalties.
If you need help understanding when 1099s are required or have any other tax-related questions, Kondler & Associates, CPAs, is here to assist you. We offer accounting services tailored to your business’ needs so that you can keep your finances in order and focus on the areas that matter most. Please reach out today for a consultation.