1099s can be confusing. Who gets them? In what circumstance? Who is exempt?... let’s deconstruct...
by Katey Maddux
What is a 1099
In short: a form. There are many types, (1099-MISC, 1099-INT, 1099-C, DIV), but the most common is the ‘1099-MISC’. The IRS requires businesses to send Form 1099-MISC to companies or vendors that serve as independent contractors.
This form provides information to the IRS to help it track independent contractor income similar to the way the W-2 supplies information about employees.
All Form 1099 filers must have an EIN. If you have not previously filed a Form 1099 or other return, you must obtain an EIN and include it on each Form 1099 that you file.
Independent Contractor: temporary workers or companies that provide goods or services to another company and are not on the payroll (W2). A 1099 is what independent contractors use to calculate and file their taxes.
There are 3 copies of a 1099-MISC: 1 goes to the IRS, 1 goes to the contractor (some states require 2), and 1 copy is kept for your records.
Who gets a 1099-MISC
You must send out a Form 1099-MISC to all contractors you’ve hired and paid more than $600 this year. This includes any sole proprietors, partnerships or LLCs you may have worked with.
Form W-9 is used to collect information for the 1099-MISC. You (the small business) may request a W-9 from your vendors/contractors to acquire information like the contractor’s full name, EIN, address, etc. This form does not go to the IRS, it is just for your records.
Who is exempt (doesn’t get a 1099)
The IRS generally exempts corporations from receiving Form 1099-MISC
However, there are a few types of corporations who DO require 1099s
1. Legal fees paid to a law firm
2. Payments for medical services (includes veterinary services) to healthcare companies
If you are uncertain if an individual or company is tax exempt, then you may wish to request Form W-9 from the company
Businesses must send 1099s to all contractors and the IRS by January 31 (the same deadline for sending out W-2s) if payments were made to independent contractors (NEC).
**The rules change regularly, so it’s important to review deadlines annually
The Client (You): Collect Form W-9 for each contractor, which includes their name, address and Social Security number (SSN) or employer identification number (EIN).
- It’s a good idea to check with each contractor to see if any information has changed prior to starting the 1099 process.
- If the contractor has not provided a W-9 or omitted specific information, the IRS says that you can withhold 28% of the contractor’s pay and send this directly to the IRS; this is known as “backup withholding.”
Client (You): Send W-9 and your EIN to Millennial Accounting (if we don’t have it already)
Millennial Accounting: Gets the 1099-MISC, fills out the forms
Millennial Accounting: Sends 1099s to contractors and IRS by Jan 31st and will send a copy to client for their own record keeping
Special Rules: Vendors Paid by Credit Card
Form 1099-K: Reports payments from third-party processors (i.e. PayPal) or from credit/debit card transactions.
If a business pays a contractor with a credit/debit card or via PayPal -- the business does NOT need to issue a 1099-MISC to the contractor because the transaction falls under the 1099-K rules. (Paypal and other processors report the information to the IRS for you on a 1099-K)
Special Rules: Real Estate
Payments of rent to real estate agents or property managers DO NOT require 1099-MISC.
However, the real estate agent or property manager must use Form 1099-MISC to report the rent paid over to the property owner. (Per the IRS Exemptions https://www.irs.gov/instructions/i1099mss)
Real Estate Professionals should receive 1099-MISCs from their brokers
Errors that constitute penalties:
Misspelled last names
wrong $ amounts (unless within $100 of actual $)
Form 1096- summary form of the 1099s. This form goes to IRS showing how many 1099s were issued and the total dollars. It is only sent to the IRS if you file on paper, a 1096 is NOT required if you file 1099s online.