What is a 1099? Types, details, and how to pay contractors

What is a 1099 form used for?

Your business will use a 1099 tax form to report payments made to nonemployees. The tax form 1099 is a return you file to the IRS, which includes information about your business. There are several types of 1099 forms, but the most common ones are the 1099-MISC, which is used to report payments like rent, and the 1099-NEC, which is used to report payments made by a business to nonemployees. Form 1099-MISC and 1099-NEC are different from Form W-2, which reports salary or hourly wages.

As a business owner, you have to report the income you’ve paid independent contractors for outsourced work. Contractors rely on 1099s to accurately file their tax returns and pay their self-employment taxes.

Independent contractors can be vital to growing your business. Working with contractors allows you to outsource projects and certain skilled services, so you don’t have to hire a full-time employee. However, you must understand the differences in paying and reporting income for employees vs. independent contractors.

Neglecting to do so can also put you in bad standing with the IRS, including accumulating penalties against your business.

Who receives a 1099 form?

Any person or independent contractor—corporations not included—who receives at least $600 in nonemployment income during a calendar year should get a Form 1099. This includes:

• Anyone who is not an employee, which is someone who gets a salary or hourly wage
• The self-employed
• An LLC that does not file as a corporation
• Anyone who has control over how and when they work, such as a freelancer. 

As a small business owner, you should provide a 1099 form to these workers so they can file their taxes.

What you need to know about 1099 forms and how they work

Types of 1099 forms

All types of 1099s apply to businesses, but the most commonly used 1099 forms are 1099-MISC, 1099-NEC, 1099-R, and 1099-S.

Here are some of the different types of 1099 forms and when you should use them:

1099-MISC

Form 1099-MISC is used to report miscellaneous payments such as rent, awards, royalties, medical and health care payments, and more. Anyone who has paid at least $600 in one of these categories in the past year will typically use a 1099-MISC form. 

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31. 

1099-NEC

Form 1099-NEC reports nonemployee income. Independent contractors used Form 1099-MISC in prior years but use the 1099-NEC for tax years 2020 and beyond. You will only need a 1099-NEC for payments totaling $600 or more for the calendar year.

Due to recipient: Jan 31

Due to IRS: Jan  31 

1099-A

Form 1099-A reports the acquisition or abandonment of secured property (foreclosure). Lenders typically use this form after transferring a property due to foreclosure.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-B

Form 1099-B reports proceeds from broker and barter exchange transactions. Brokers use this form to report the sale of stocks, securities, and the like. Brokers must submit a 1099-B to each individual to report gains or losses from transactions.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-C

Form 1099-C is for the cancellation of debt. A debtor sends this form to the individual with a canceled debt. This is used for credit card debt forgiveness because the IRS often considers canceled debt taxable income.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-CAP

Form 1099-CAP reports changes in corporate control and capital structure. Businesses issue this form to shareholders who receive cash, stock, etc. from substantial structural changes or acquisitions.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-G

Form 1099-G is for certain government payments. Government agencies use this form to report income paid to taxpayers—typically tax refunds and unemployment.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-K

Form 1099-K reports digital payments and withdrawals through credit cards and third-party payment processors. It reports a total gross income of more than $5,000 for tax year 2024 from debit and credit cards when using online marketplaces and payment apps.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-R

Form 1099-R is for distributions from retirement or IRAs. This form is used for withdrawals from an individual retirement account. You may also use it to report distributions from pension plans, profit-sharing, and annuities.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-S

Form 1099-S is for proceeds from real estate transactions. This form is used to report income from the sale or exchange of real estate, and you may also use it for income from certain royalty payments.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

1099-DIV

Form 1099-DIV is used to reference any interest income, dividends, tax refunds, or unemployment benefits paid out by banks or other financial institutions.

Due to recipient: Jan 31

Due to IRS: By mail: Feb 28. Electronically: March 31.

Differences between W-2 vs. 1099 forms

When running a business, you may hire both employees and independent contractors, so it's essential to understand the differences between 1099 forms and W-2 forms. 

A 1099 worker is classified as an independent contractor or freelancer, responsible for their taxes, while a W-2 worker is an employee of your business.

Correctly classifying workers as either employees or independent contractors is crucial to complying with tax laws and avoiding potential penalties. 

Worker Classification and IRS tests 

The IRS uses three main guidelines to determine whether an individual is an independent contractor or an employee. 

• Behavioral: Considers the extent to which the business controls how the work is done, including factors such as the employer's instructions, training, and evaluation of the worker's performance.
• Financial: Assesses whether the employer controls the worker's financial aspects, such as how they are paid, whether they can hire or fire employees, and if they have a profit motive.
• Relational: Examines the relationship between the employer and the worker, including benefits, taxes, and other employment-related matters.

If a worker meets the criteria for being an employee, the employer must issue a W-2 form and pay payroll taxes. If a worker meets the criteria for being an independent contractor, the employer must issue a 1099 form.

Penalties for misclassification of workers

Misclassifying workers can result in significant penalties and fines, including:

• Civil penalties: The IRS may impose civil penalties for each misclassified worker.
• Back taxes: The employer may be liable for unpaid employment taxes.
• Criminal charges: In severe cases, misclassification can lead to criminal charges.

To avoid these penalties, businesses should make sure they’re correctly classifying workers.

The IRS offers programs, like the Voluntary Classification Settlement Program (VCSP), to help businesses determine worker status and avoid misclassification penalties.

How to fill out and file a 1099 form

Like any other tax form, you need to fill out several boxes in the 1099 form. The key components of a 1099 form for independent contractors include:

• Company name
• Company address
• Payer’s Taxpayer Identification Number (TIN)
• Recipient’s TIN
• Employee compensation

There is also a box for backup withholdings, which typically applies to investors. However, if a vendor provided you with the incorrect TIN or no TIN, you may need to fill this section in.

Paying a 1099 contractor is done either manually through cash or check, or digitally through direct deposit or a third party like Venmo. The key to a healthy relationship with your contractors—and remaining in good standing with the IRS—is to follow the proper payment process. Here are a few key steps to follow to make sure you pay your 1099 workers correctly:

Step 1. Have each contractor fill out a W-9

While this might seem like a small step, it is essential to properly complete their 1099. It’s best to get a W-9 from the contractor as soon as you start working with them.

But what is a W-9? Form W-9 is a payroll form used to gather information about the contractor, specifically their:

• TIN
• Legal business name
• Contact information
• Social Security number
• Full legal name

There is no official deadline for the W-9, but you should ensure that you receive it from each contractor before the end of the tax year. 

Step 2. Pay your contractors accurately and on time

Since 1099 workers aren’t on payroll, you will need to manually pay them via cash or check or an online solution such as PayPal or Venmo. To further simplify things, you can also use payroll services and software like QuickBooks to automatically track invoices and make payments for each independent contractor.

Step 3. Determine whether you are responsible for backup withholdings

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 returns. Self-employment taxes cover Medicare and Social Security taxes that are traditionally paid by employers on behalf of their employees.

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%. 

To avoid this, you can use two IRS services that match up to 25 companies and verify their W-9 information:

• Interactive TIN matching
• Bulk TIN matching

Step 4. Fill out Form 1099, file it with the IRS, and send a copy to the contractor

This is where the information from the W-9 comes in handy. 

You will fill out the 1099 with the contractor’s information, including:

• Their legal name
• Their TIN
• Their business entity type
• The total amount you’ve paid them throughout the year

If you use payroll software, you’ll have payment information readily available. If you don’t, then you’ll need to compile the information by hand. Once you complete Form 1099-MISC/NEC, you should send Copy B to the contractor so they can file their taxes. File Copy A with the IRS and retain Copy C for your records. 

If you are issuing 1099s to vendors, you need to send them out by Jan 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.”

Find peace of mind come tax time

Tax season doesn't have to be a headache. Knowing what a 1099 is and how it works can help you stay organized and avoid last-minute stress.

Need some help with your 1099s? Consult your CPA or a tax advisor for expert guidance. QuickBooks offers hassle-free 1099 e-filing services with QuickBooks Payroll and QuickBooks Contractor Payments. 

Streamline your tax preparation with automatic 1099 generation and e-filing. File unlimited 1099s, including 1099-NEC and 1099-MISC.

QuickBooks Online Payroll & Contractor Payments: Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services, subject to eligibility criteria, credit and application approval. For more information about Intuit Payments Inc.’s money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/