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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.
The IRS 1099 form is what the IRS refers to as an information return. It is a record that an entity or person—rather than your employer—paid you money, likely as an independent contractor, separate from the W-2 for wages, salaries, and tips. There are several kinds of 1099 forms.
There are several different types of 1099 forms to help designate the type of payments made, but the two 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.
As a small business owner, you likely have two types of workers: in-house staff (either part-time or full-time) and independent contractors.
These two types of staff receive different tax forms because they are taxed differently. An in-house employee will receive a W-2, 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 two forms are not the same, and an in-house employee shouldn’t receive both a W-2 and a 1099-NEC form.
Similar to W-2 forms, 1099 forms are due to recipients by January 31. If you’re already creating W-2 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.
To complete a 1099 form, you may request that your independent contractors submit completed W-9 forms at the start of the tax year. The W-9 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 W-9 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 paid them only $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.
Companies create 1099s either electronically through Quickbooks (or your accounting software), through a web source like irstaxfilings.com, or sent manually to all recipients who made $600 or more from your company. Office Depot or Staples and similar companies offer 1099 forms. When you are finished going through all W-9s, you should identify who should get a 1099-NEC or 1099-MISC and then ensure you have the correct address and Social Security number or EIN. You will also need envelopes that are sold along with the forms.
Income is filed in box 1 on the 1099-NEC in Non Employee Compensation, while the-1099 MISC has boxes for: 1) Rent, 2) Royalties, and 3) Other Income. If you file electronically or through a third party on the internet, they will make sure the employee gets the 1099, by January 31st. If you are doing it yourself, you will need to separate the four copies:
Along with Copy A Internal Revenue Service and 1. State Department, you need form 1096 to tie everything up and have the full amount paid out. This will be sold with the kit, and all forms for all employees, plus the 1096, are mailed to the IRS and State Tax Department.
As you review your W-9 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.
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.
While you have until January 31 to submit your 1099 forms, you don’t need to wait. You can start collecting W-9 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.
I am a director-level Accounting and Finance Professional with over 20 years of progressive experience in the Entertainment industry. My career has allowed me to lead all accounting actions for large organizations, including month-end close, budget analysis, and internal controls. I am a CPA with a MBA from the University of California, Irvine.
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