Demystifying 1099s: Who, What, When, and Where ...
Surprised by tax laws? Join the club!
Small business owners can find themselves in a bad spot if they haven't done their tax homework or sought out professional advice. Given the IRS's recent increase in penalties for 1099s, today's blog post is devoted to keeping you in compliance so you don't have any unfortunate (and costly) surprises.
If you’re like many small business owners, hiring other professionals to help complete a project for your client may be necessary, but figuring out the potential tax paperwork is probably not at the top of your list. Let's dig in!
Who needs to issue a 1099?
Generally, you should issue a 1099-MISC or the NEW 1099-NEC when you pay $600 or more to another person or entity within a tax year for business purposes. Use Form 1099-NEC when you are paying non-employee compensation and Form 1099-MISC for all other payments. If the payment is for personal reasons there is no need to issue a 1099.
Examples of services that require a Form 1099:
Services performed by independent contractors,
Prizes and awards,
Rent (if under a commercial lease),
Royalties (if paid $10 or more; exception to the $600 rule), and
Interest on business debts.
Exceptions to issuing 1099s:
You paid the vendor with a credit or debit card. Another exception is if you paid via a third-party payment network like PayPal and marked the payment as a payment for services (and not as a personal transaction).
Services such as phone service or internet do not require you to file a 1099;
Corporations. You do not have to issue 1099s to incorporated businesses. How do you determine if a business is incorporated? Always ask someone to fill out a form W-9 if you are paying them $600 or more. This form gives you all the information you need to issue a 1099 and they must declare if they are a corporation (i.e. they would check the “C Corporation” or “S Corporation” box on line 3 or “LLC” taxed as C or S corporation). If any of these boxes are checked, you can disregard issuing a 1099.
If you are paying an attorney, you may still need to issue a 1099 even if they are a corporation (or LLC taxed as a corporation).
When to issue a 1099?
Form 1099-MISC and Form 1099-NEC must both be issued to the recipient and the IRS. The table below shows the due dates for each.
Due Dates for the Current Tax Year
- January 31, 2024: 1099-NECs due to all recipients and IRS; 1099-MISC due unless only income is reported in Box 8 or Box 10.
- February 15th, 2024: 1099-MISC with only Box 8 or Box 10 income reported.
- February 28, 2024: 1099-MISC to IRS if filing on paper.
- March 31, 2024: 1099-MISC to IRS if filing electronically.
The above dates stay the same in most tax years. The exceptions are if the deadline falls on a Saturday, Sunday, or legal holiday, then the return (Form 1099) is due the next business day.
How to issue a Form 1099?
You need to issue Form 1099 to both the recipient AND the IRS. The IRS also requires a summary form to be filed called a Form 1096, see below.
Electronically
Forms can be electronically filed with the IRS by enrolling in their FIRE program. See IRS FIRE for details. There are also some online service providers such as Track 1099 to file forms to the recipient and the IRS.
Paper
If you are issuing a small number of Forms 1099-MISC, paper filing is an easy option. Beware though! Do not print these from the IRS website. If you print from their website, these forms are not able to be scanned. The IRS may penalize you for a form that can’t be scanned. You can order an appropriate Form 1099-MISC or 1099-NEC from office supply stores or directly from the IRS.
Summary Form 1096
The fun doesn’t end! If you are filing by paper, the IRS also requires you to submit a summary return Form-1096, which is a top-level summation of all information returns you are filing. Complete and submit this along with the 1099s you are sending to the IRS.
What happens if I don’t issue a 1099?
We all get busy, especially small business owners, so it is easy to forget about issuing 1099s. Don’t let this happen! The IRS recently started cracking down and the penalties for not issuing a 1099 are STEEP! If you’re ever unsure if you should issue a 1099, please consult a tax professional. Investing in a short consult could save you a significant amount in penalties.
Penalties for Late Issuance
- $60 per 1099 if not more than 30 days late
- $120 per 1099 if 31+ days late (but before August 1st)
- $310 per 1099 if after August 1st or not at all
- $630 per 1099 if intentional disregard
Whew, that's about it! It's been a lot of information, but we hope it’s been useful and will get you on track for filing your 1099s. As always, Polaris Tax and Business Services is here to help with your tax preparation and planning needs. If you’re ever in doubt or short on time, we’ll be happy to take the tax stress off your shoulders so you can focus on what you enjoy!
