If you are a business owner, you’ve likely heard these 4 numbers together – 1099. You have either received one or have been told that you need to send them out.
As we are approaching year end, I want to make sure you know just enough about 1099’s as a business owner to avoid tax time headaches and potential fines. I’m going to give you one key tip. If you don’t read any further than this next paragraph because your eyes are glazing over, you can at least have one important piece of information.
What is the one thing you need to make sure you know about 1099’s?
If your business pays a subcontractor, vendor, etc (which can be an individual or another business) over $600 in a year, you may need to send them a 1099. The rule of thumb at Vegter Financial, assume anyone you pay needs a 1099. The one thing to walk away with, if you pay a contractor you need to request a W9 from them so you can send a 1099 at year-end.
If you are a contractor that has received a 1099, you must report this income on your tax return. The IRS gets a copy of this same form and will match them to ensure they see the income was reported.
Important: You should always report all income you receive, regardless if you got a 1099 or not.
Download your free 1099 decision guide here!
Now, I’ll dig in a little deeper for those that haven’t left the conversation yet 🙂
What is a 1099?
In simple terms, a 1099 is an informational filing form used to report on salary income to the IRS. There are over 15 different types of 1099 forms that are used for various purposes.
What are the most common 1099 forms?
- 1099-NEC: This form is used to report non employee compensation (more on this one below)
- 1099-MISC: Used for other items including rent, royalties, prizes/awards, other income, etc.
- 1099-INT: Required to be filed by financial institutions if they pay you more than $10 in interest during the year.
- 1099-K: These are issued by third-party payment processors if payments over the year total $600 or more (think credit cards, PayPal, Venmo, etc.)
- 1099-DIV: Used to report distributions like dividends, capital gains, etc.
- 1099-G: Used to report unemployment compensation, state tax refunds, etc.
- 1099-R: Used to report a distribution from a retirement plan.
The most common forms we see business owners needing to deal with are the 1099-MISC and the 1099-NEC.
When do I need to file a 1099-NEC?
If you paid a contractor more than $600 total in a year, you would need to send them a 1099-NEC. This includes individuals, subcontractors, companies, vendors, etc and could be payment for services performed, parts and materials, etc.
Exceptions where a 1099-NEC would NOT need be required to be filed:
- Payments to C or S Corporations
- This exception does not apply for payments to attorneys for legal services. You will know if the vendor is exempt for this reason by reviewing their W9 form.
- Employees – A W-2 should be submitted for all employees
- Payments for merchandise, telephone, storage, freight, etc.
- Payments to non-U.S. citizens performing work outside of the U.S.
- Payments made via merchant processors – aka through credit cards, PayPal, Venmo, etc. (those processors will report the payments to your vendors via a 1099-K)
This means if during the normal course of business you pay someone via check, wire, cash, Zelle, etc. you more than likely will be required to send them a 1099-NEC unless one of the exceptions outlined above are met.
What is the typical 1099-NEC process?
- Step 1 – Collect a W9 from ALL contractors you pay (even if you haven’t hit the $600 threshold). This is super important!
- The Vegter Financial rule – before you pay anyone, collect a W9 from them.
**Pro Tip** You can save the W9 forms in their QuickBooks vendor profile and also check the 1099 box to track their payments for easily reporting at the end of the year.
- Step 2 – If a 1099-NEC is required, prepare and submit using the information provided on their W-9 form.
- Step 3 – Send a copy of the 1099-NEC form to the contractor.
- Step 4 – File a copy of the 1099-NEC form with the IRS and State (if required)
**Pro Tip** We use a 1099 tracking software at Vegter Financial to aid in the preparation and filing of those 1099’s.
When do 1099’s need to be filed by?
1099 forms must be filed with the IRS and sent to the recipient by January 31st of the following year.
What are the penalties for not filing 1099’s?
This depends on how late you are. (Please note, these penalties may have changed since the time of this publication)
- File within 30 days past the deadline: $50 per form
- File more than 30 days past the deadline but before August 1st: $110 per form
- File after August 1 or not at all: $280 per form
- Intentional Disregard: $570 per form
Those fees can add up! Our tip, make sure those 1099’s are filed and work with a pro (like Vegter Financial) if you need help.
Summary
Navigating 1099 forms doesn’t have to be daunting. By following the steps outlined in this post and using our free 1099 decision tree (linked below), you can ensure your business stays compliant and avoids unnecessary penalties. Remember, staying organized and seeking professional guidance when needed can save you time, money, and headaches during tax season.
- Collect a W9 or W8 (International) from all contractors, vendors, etc that you pay.
- Total payments throughout the year that are $600 or more will trigger a 1099 requirement, unless certain exceptions are met.
- Use a 1099-NEC for contractors/vendors/attorney payments and a 1099-MISC for rent payments.
