A 1099 form alerts the IRS of payments over $600 made from your company to businesses or people who are not part of your typical payroll. People receive 1099 forms if they were paid as an independent contractor or if they received other sources of income from a business throughout the year exceeding this $600 threshold.
The 1099 form is also used by individual filers to calculate their gross income when completing their 1040 forms.
It’s the employer’s responsibility to complete and submit the correct 1099 forms to the IRS and to businesses, people, or independent contractors. It is not the role of the recipient to report how much they earned. Learn more about the 1099 form and how it’s used.
What’s the Difference Between 1099-NEC and 1099-MISC?
There are several different types of 1099 forms to help designate the type of payments made, but the 2 most popular 1099 forms are the 1099-MISC and the 1099-NEC.
Prior to 2021, the 1099-MISC form was used to report payments made to independent contractors as well as businesses or people who earned more than $600 annually in rent payments, legal settlements, or financial prizes. The IRS has since designated 1099-NEC as the tax form to report payments made to independent contractors specifically, and the 1099-MISC is used for all other payments.
What Are 1099 Forms Used For?
As a small business owner, you likely have 2 types of workers: in-house staff (either part-time or full-time) and independent contractors.
These 2 types of staff receive different tax forms because they are taxed differently. An in-house employee will receive a W2, which includes information about the payroll taxes you withheld throughout the year, while an independent contractor will receive a 1099-NEC form and is responsible for their own employment taxes. These 2 forms are not the same, and an in-house employee shouldn’t receive both a W2 and 1099-NEC form.
When Are 1099 Forms Due?
1099 forms are similar to W2 forms: they’re due to recipients by January 31. If you’re already creating W2 forms for your employees, make sure your accounting team is submitting any necessary 1099 forms as well.
Along with issuing copies of 1099 forms to your contractors, you’ll need to submit copies of these documents to the IRS by February 28, along with a 1096 form cover sheet.
What Do I Need to Complete a 1099 Form?
To complete a 1099 form, you may request that your independent contractors submit completed W9 forms at the start of the tax year. The W9 form will contain relevant information like your contractor’s legal name, address, and Social Security number—or their Employer Identification Number, known as an EIN.
Before completing your W9 forms, ask your contractors if their information is up-to-date in the event that your contractor has moved during the year or changed their legal name.
Once you have this personal information confirmed, you can complete the appropriate 1099 form. As the employer, you will record what you paid the contractor for that tax year. This is the most important section that you will fill out.
Income doesn’t reflect the work that the contractor did for you or any money you may owe them—it only reflects the contractor’s pay. For example, if an independent contractor completed $2,000 of work for each month of 2020, totaling $24,000, but didn’t send an invoice for December until early January 2021, then you likely only paid them $22,000—and that is the amount you will report.
Your accounting team should be able to record what you pay each independent contractor to ensure each 1099-NEC form is accurate.
What Is an Employer Identification Number?
As you review your W9 forms and complete your 1099s, you may notice that some independent contractors don’t use their Social Security numbers (SSNs) in professional work. Instead, they will use an Employer Identification Number (EIN). EINs are created by the IRS to identify a business entity like an LLC. Contractors will use EINs to protect their personal information and to represent their business when working with an organization.
Both SSNs and EINs are acceptable when completing 1099 tax forms for independent contractors and do not affect the filing process.
What If I Don’t Submit a 1099 Form?
If you owe a 1099 form but fail to meet the deadline to submit it, then the contractor, business, or person can file a complaint to the IRS. Your company could face fines starting at $250, though there’s no limit to how much the fine could be. The IRS wants to prevent repeat offenders from failing to provide 1099 tax forms and to penalize organizations that withhold 1099 forms, impeding the tax filing process.
Contractors that fail to receive 1099-NEC forms can estimate their income when filing their taxes and then make an adjustment once the form arrives.
Start Preparing Your 1099 Forms Early
While you have until January 31 to submit your 1099 forms, you don’t need to wait. You can start collecting W9 information early on to prepare your documents, so your contractors have the needed information. If the January 31 deadline has already passed, work to issue your 1099 forms as quickly as you can to help your contractors file their taxes.
At Sunrise, we can help with your business taxes. Check out our Tax Assist center for a comprehensive checklist as well as a tax estimator to better understand what your small business will owe.