1099 Requirements for Businesses: What You Need to Know
The Internal Revenue Service (IRS) requires a business to complete and distribute 1099 forms to payees and the federal and state taxing authorities. The 1099 form allows businesses to report payments made to another as income, not including wages made to employees. Below is more information on requirements businesses should understand regarding 1099s.
Types of Income Payments Reported on 1099 Forms
The forms are typically used for independent contractors. However, they can be used to report a range of other types of income payments and miscellaneous income. Some of the common types of payments that get reported on 1099s include:
- Royalty payments
- Dividends and interest payments
- Commissions
- Nonemployee compensation
These are not all of the types of income payments that would typically require a 1099, but they are some of the most common ones for businesses.
Types of 1099 Forms
Multiple versions of the 1099 exist and are used for a range of purposes. Many businesses will only be required to use the 1099-NEC. However, it’s important to have a basic understanding of the other types in case they are needed.
The 1099-NEC is used to report nonemployee compensation. This would include money paid to freelancers and independent contractors, for example. This form hadn’t been used for several decades but was reintroduced during the 2020 tax year. Before that, this type of income was reported on the 1099-MISC.
Now, the 1099-MISC form is only used for other types of payments. This includes rent, prizes, royalties, crop insurance proceeds, and medical and health care payments. Payments of rent to or through real estate agents will often be exempt from requiring 1099s.
The 1099-INT form reports interest payments from banks and investment firms, while the 1099-DIV reports payments to investors including cash dividends. A 1099-G form is used to report unemployment payments or local tax refunds. 1099-R forms are used to report payments from taxable pension retirement plans, IRAs, and some life insurance plans.
The 1099-B forms are used for stock sales and commodities, and the 1099-S reports real estate transactions that gain money. This could include the sale of commercial or industrial properties, residential properties, or land.
Rules to Follow
Filing taxes is never easy. Over the years, 1099 forms have undergone a host of changes, and businesses need to keep up with the rules as best they can.
The $600 Threshold
If a business pays $600 or more in compensation, they are required to send copies of the 1099-NEC to the contractors, as well as the IRS. This threshold applies to other 1099 forms, as well. Taxpayers who earn less than $600 must still report the income even if they are not required to receive a 1099 from your business.
The Dates and Deadlines
Businesses are required to provide 1099-NEC forms to contractors, vendors, and the IRS by January 31. However, if the 31st falls on a weekend, the due date will be on the following Monday. Other 1099 forms discussed above will need to be sent to the IRS by February 28th. You could also file electronically and file by March 31st. If you have more than 250 Form 1099s that need to be filed, you must do so electronically.
Foreign Workers
If your business hires a non-U.S. citizen who works remotely from another country over the Internet, you will not usually need to file a 1099 for that person. However, if that worker performs any work for your inside of the United States, you will need to file a 1099.
PayPal and Credit Card Payments
Most of the time, businesses will not be required to send 1099 forms to independent contractors or unincorporated businesses if they were paid electronically using credit cards or PayPal. Instead, the payment companies will handle all of the reporting.
Payments to Corporations
If your business makes a payment to a corporation, you will not typically need to provide 1099 forms. This can include independent contractors who are operating as an S-Corp. Keep in mind that if someone is operating as a limited liability company, it is different from a corporation. Therefore, your business is required to send 1099 forms to LLCs not taxed as an S-Corp or C-Corp.
Lawyers
You will always be required to send your lawyer a 1099 form if you paid them more than $600 over the year, even if they are incorporated.
Personal Payments
If you make personal payments to someone through your business, 1099 forms are not required. The only time you would need to file a 1099-MISC would be to report payments made while doing a trade or business.
When a Vendor Refuses to Give You a W9
If a person or business is reluctant to provide a W9, it could indicate you are dealing with someone trying to evade taxes or an illegal business. It’s best to avoid working with them if possible.
However, if you do work with a vendor who refuses to supply a W9, backup withholding is required. Rather than sending the vendor the entire fee, you would send 24% of it to the IRS with Form 945. You can stop backup withholding when you receive the filled-out W9. It is important to keep in mind that the IRS places this burden on the business and not the vendor.
Check Your State Requirements
Some states have specific requirements for filing 1099s and will require that a 1099-NEC be filed with them. The states that currently require this include CA, DE, HI, KS, MA, MT, NJ, OH, OK, OR, PA, RI, VT, and WI. If you operate in one of those states, check their most recent deadlines and rules to ensure compliance.
Help from a Professional
Understanding all of the tax laws and ensuring all of the 1099 forms are filled out, filed, and sent correctly can be confusing even when you feel you understand the rules. The laws can change from year to year, and it’s often better to work with a professional accountant or tax professional who can handle it for your business.
