A 1099 is a tax form that is used to record non-employee income. The 1099-MISC form is often considered a catchall for income that doesn’t fit into other categories. However, the most popular use of 1099s is reporting independent contractor payments for services provided to a business.
Independent contractors can be vital to growing your business in an affordable way. Working with independent contractors allows you to outsource help with projects and certain skilled services, so you don’t have to bring someone on full time. However, it’s essential that you understand the differences in paying and reporting income for employees and independent contractors.
For independent contractors, a 1099 must be issued at the end of the tax year, providing a record of the total they were paid for their services. As the business owner, it is your responsibility to fulfill this tax obligation correctly; otherwise, you could face penalties.
In this post, we’ll cover what a 1099 is, who should receive a 1099, and what you need to know about your business’s obligations when it comes to issuing 1099s. To quickly find the answer to a specific question, use the links below.
- What is a 1099?
- Why are 1099s important?
- What are the components of a 1099?
- Types of 1099s
- Which employees are eligible to receive a Form 1099?
- Mailing out 1099s
- How to pay 1099 workers
- How to file a 1099
- 1099 best practices
A 1099 is an IRS (Internal Revenue Service) tax form known as an information return. There are several types of 1099 forms, but the most common is the 1099-MISC, which is used to report miscellaneous income. The 1099-MISC is used to report other types of income, but the W-2 is used to report salary or hourly wages.
It is important to note that several tax law changes go into effect in 2020 and beyond. While the 1099-MISC is still used to report general nonemployee compensation, there is now a Form 1099-NEC that is specifically for independent contractors. So, if your business is using independent contractors to complete projects, you’ll need to start using Form 1099-NEC going forward.
As a business owner, you are required to report income you’ve paid independent contractors for outsourced work. Independent contractors rely on 1099s to accurately file their tax return and pay their self-employment taxes.
Neglecting to do so can also put you in bad standing with the IRS, including accumulating penalties against your business.
Like any other tax form, several boxes need to be filled out on the 1099-NEC. The key components of the 1099 for independent contractors include:
- Company name
- Company address
- Payer’s Taxpayer Identification Number (TIN)
- Recipient’s TIN
- Employee compensation—anything over $600 is considered taxable income and should be reported
There is also a box for backup withholdings, which typically applies to investors. However, if a vendor has provided you with the incorrect TIN or no TIN, you may need to fill this section in. We’ll cover backup withholdings in more detail in the “How to pay 1099 workers” section.
While this post will be covering the 1099-MISC/NEC for independent contractor payments, it’s important to note that there are many types of 1099s. The most commonly used 1099 forms include:
- 1099-MISC/NEC: This form is used to report nonemployee income, rents, awards, royalties, medical and healthcare payments, and more. The 1099-MISC was used for independent contractors in prior years, but the 1099-NEC is used for tax years 2020 and beyond. You will only need a 1099-NEC for payments totaling $600 or more for the calendar year.
- 1099-A: This form is typically used by lenders when a property has been transferred due to foreclosure.
- 1099-B: This form is used by brokers to report the sale of stocks, securities, etc. Brokers must submit a 1099-B to each individual to report gains or losses from transactions.
- 1099-C: This form is used for credit card debt forgiveness because the IRS often considers canceled debt to be taxable income.
- 1099-CAP: This type of 1099 is issued to shareholders who receive cash, stock, etc. from substantial structural changes or acquisition.
- 1099-G: This form is used by government agencies to report income paid to taxpayers. These government payments typically tax refunds and unemployment.
- 1099-R: This form is used for withdrawals from an individual retirement account. It may also be used to report distributions from pension plans, profit-sharing, and annuities.
- 1099-S: This form is used to report proceeds from the sale or exchange of real estate. It may also be used for income from certain royalty payments.
Additional 1099 IRS forms (such as 1099-DIV) are used to reference any interest income, dividends, tax refunds, and unemployment benefits.
Figuring out which types of employees are eligible for a 1099 can be confusing, even if you’ve worked with independent contractors before.
Here are some key factors to keep in mind to help you determine which workers should receive a 1099:
- They are not an employee—an employee is someone who is paid a salary or hourly wage
- They are self-employed
- They are an LLC that is not taxed as a corporation
- They have control over how and when they work—you only stipulate the specs for the project delivery
- They have been paid a total of $600 or more for their services within the past year—1099s are not required below this threshold
Some examples of workers who typically receive 1099s include:
- Freelancers like graphic designers, writers, and web developers
- Consultants such as marketing, HR, IT, and cybersecurity
- Subcontractors like cleaning personnel and maintenance
In general, any individual or entity that is not an employee who is paid an hourly or salary wage should receive a 1099. If you are paying for services provided by a corporation, you will not need a 1099. The IRS does not require payments made to corporations to be reported on a 1099.
When is a W-9 issued?
In addition to the Form 1099, you may also need to send vendors a W-9. Independent contractors are responsible for paying their own taxes on their earnings. However, you are required to track how much you pay them throughout the year and report it to the IRS. Part of doing that is having the correct vendor information, which you get from the Form W-9 completed by the vendor.
The W-9 form is used to gather information about the contractor, specifically their:
- Legal name of the business
- Contact information
- Social Security number
- Full legal name
There is no deadline for the W-9, but you should ensure that you receive it from each contractor before the end of the tax year. Once they receive it, they will complete the W-9 form and send it back to you.
You are required to provide 1099 forms to all eligible independent contractors that you’ve worked with in the previous year. If you are issuing 1099s to vendors, you need to send them out by January 31 at the latest. According to the IRS, requiring businesses to comply with this deadline helps “fight tax fraud and verify income reported on individual tax returns.”
Forms sent after the deadline are considered late. If you fail to send 1099s by January 31, you may be subject to IRS penalties. For example, small businesses—those with gross receipts of $5,000,000 or less—may have to pay $50 per late form. This penalty can add up quickly, especially if your budget is already strained, so make sure you set a reminder for the 1099 deadline.
You may also need to submit 1099s to your state tax authority, so you may want to consult your CPA or a tax professional.
- Each contractor fills out a W-9 and sends it back to you. While this might seem like a small step, it is essential to properly complete their 1099. It is best to get a W-9 from the vendor as soon as possible when you start working with them.
- Pay your contractors accurately and on time. Since 1099 workers aren’t on payroll, you will need to manually pay them via check or an online solution such as PayPal or Venmo. To further simplify things, you can also use payroll services & software like QuickBooks to automatically track invoices for each independent contractor and make payments.
- Determine whether you are responsible for backup withholdings. If the contractor did not provide a TIN—or provided the wrong TIN—you may be responsible for backup withholdings on their behalf. If this is the case, the withholding rate is 24%. Typically, you won’t have to worry about withholding for 1099 workers because they are responsible for paying self-employment taxes on their income tax return. Self-employment taxes cover Medicare and Social Security taxes that are traditionally paid on behalf of the employees by their employer.
- Fill out 1099-MISC/NEC and send it to the vendor. This is where the information from the W-9 comes in handy. You will fill out the contractor’s information—legal name, TIN, type of entity, etc.—as well as the total amount you’ve paid them throughout the year. By using payroll software, you’ll have payment information readily available. Once you complete Form 1099-MISC/NEC, you should send Copy B to the vendor so they can file their taxes. Hold on to Copy A for your taxes.
You must submit Copy A of the 1099 by January 31. You can either mail or e-file Form 1099. However, if you choose the mail it in, the process becomes a bit more complicated because you’ll need to complete Form 1096 as well. A 1096 form must be completed and mailed in for every 1099.
Note that if you have 250 or more 1099s to submit, the IRS requires that you e-file. Many businesses opt to e-file even when they have just a few 1099s because it’s more convenient, and they’re processed faster and with fewer errors. Plus, you get an immediate confirmation of submission.
To file 1099s electronically, you will need to use the Filing Information Returns Electronically (FIRE) system. To file with the FIRE system, you will need to ensure the forms are in the proper format. However, this isn’t so simple because it typically requires special software or help from a service provider. You’ll also need a Transmitter Control Code (TCC). These additional steps can be confusing, but the IRS has technical service operations for help with this process.
In addition, to make it much easier on yourself, you can use QuickBooks to fill out and e-file your 1099s:
- Auto import vendor information and payments from the QuickBooks database
- Auto-fill 1099s to save you time
- Print and send copies to contractors
- Submit 1099s to the IRS in the proper format and securely—QuickBooks is an approved IRS e-file provider
Here are a few 1099 best practices to streamline how you create and send out 1099s for all of your independent contractors:
- As soon as a vendor is onboarded, have them fill out a W-9
- Keep all of your contact information up to date
- Use payroll software to keep information organized
- Know your form deadlines—1099s are considered late as of February 1
- Run quarterly 1099 reports
- Keep up to date with the IRS website so you’re aware of changes in requirements
Use these tips to make it easier to meet your IRS obligations.
Stress-free 1099 prep
It’s understandable that preparing 1099s can be a little confusing and sometimes overwhelming. However, after reading our guide and watching this video, you are now better equipped to handle your contractors’ tax information. This tax season should be stress-free and smooth sailing as you prepare to send off your 1099s.
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