What is a 1099?
A 1099 (technically, 1099-MISC) is an information tax form required by the IRS that reports the amount of money you paid to contractors and includes basic information like the contractor’s name (or legal business name), address, taxpayer ID number (EIN or social security number), and the amount paid to the contractor during the year.
The IRS uses these forms to make sure that contractors are reporting all their income on their tax returns. This is necessary because contractors don’t have self-employment tax withheld from the money you pay them, and don’t get W-2s like employees do. If the income reported on a contractor’s tax return doesn’t match up with the payments made on 1099s filed under their taxpayer ID number, the IRS may call the contractor out for under reporting their income.
When do I have to file a 1099?
1099s are required if you used an independent contractor in the course of business and paid them a total of $600 or more. Payment types that apply are cash, check, or ACH/bank draft. Also, if you paid using apps like Venmo or PayPal Friends and Family, you must file a 1099 because these payment providers will not report the payments to the IRS.
What is an independent contractor?
An independent contractor is someone you hire to do a particular project or task, but is not an employee. This could be anyone from a web designer that you hire to revamp your website to a landscaper that fixes up your store’s curb appeal.
When do I not have to file a 1099?
You do not have to file a 1099 if you used contractors for personal reasons, like in fixing up your personal residence.
Also, if you paid using a credit card, debit card, or third-party payment provider like PayPal (but not PayPal Friends and Family!), the payment providers will report the funds to the IRS. This is true even if you paid more than $600.
If you hired contractors on a site like Upwork, you don’t have to file – Upwork will file the necessary forms since they are technically responsible for hiring and paying the contractors.
If the vendor is registered as a C Corporation or S Corporation, you also don’t have to file. You will be able to see this information on a Form W-9 (see below).
If you rent real estate, you should prepare 1099s for contractors only if your rental activities qualify as a business. In many cases, rental real estate does not rise to the level of a business, so you don’t have to file a 1099. If you have questions about this, talk to your CPA.
What is a W-9 and when should I use it?
A W-9 is a form that you should have all new vendors fill out. These don’t have to be filed with the IRS, but they will give you all the information you’ll need to fill out 1099s.
You don’t have to get this information if you know you won’t have to file a 1099 for a particular vendor, but in my experience, it’s best to just have your vendors fill out the form up front so you don’t run into any issues later.
What is the deadline for filing 1099s?
The deadline for filing 1099s is January 31. You need to send a copy to the IRS and a copy to your contractor by this deadline.
How do I file a 1099?
There are lots of options for filing 1099s. One option that won’t work – printing a copy off the internet and filling it out. The IRS will not accept forms completed this way.
Also, there are two copies of the form – Copy A and Copy B. Copy A should go to the IRS and Copy B should go to the contractor. You should also keep a copy for your records.
Information you’ll need to fill out the form includes:
- Contractor’s name or legal business name
- Taxpayer ID – social security number or EIN
- Amount paid – typically, this will go in box 7 of the form
There are several options for filing 1099s. Here they are, in order from the easiest to the most time-consuming:
- Let your accountant or bookkeeper handle it – If you already have a professional taking care of your books for you, they will generally prepare and file your 1099s for you for a minimal charge. For example, at Young & Company, we’ll file up to five 1099s for you for $25, and each additional form beyond five is $5.
- Use your payroll provider – If you’re using a payroll provider like Gusto, you can also pay contractors using the service. At tax time, the payroll provider can prepare and file 1099s for you.
- Use an online service – There are lots of online services out there that will charge you per form. For example, 1099online.com is an inexpensive service. QuickBooks also has a service, and if you set up vendors in QuickBooks so that payments for 1099s are tracked, it’s just a few clicks of a button to create and file the forms.
- Manual – You can request copies of 1099s from the IRS for free – here’s a link. If you go this route, make sure to order in advance so you have time to receive, fill out, and submit the forms prior to the deadline. You can also buy copies from many office supply stores. You will then need to fill out the form manually and mail copies to the IRS and contractor. Lastly, you will need to fill out and submit Form 1096, which tracks all physical 1099s you’re filing.
- Electronic – You can file returns electronically using the FIRE system. However, you’ll need to use a software system that will generate electronic 1099s for you – scanned copies won’t work. You’ll also need to fill out Form 4419 ahead of time to apply to submit electronically. Lastly, to email your contractors an electronic copy, you have to get their consent ahead of time.
What about states?
States also require that you notify them of amounts paid to contractors. However, many states participate in a combined filing, so if you submit 1099s electronically to the IRS, the forms will be automatically forwarded to the applicable states. Keep in mind that requirements vary across states, so make sure to discuss with your CPA to make sure you stay compliant.
What if I missed the filing deadline?
You’ll have to pay penalties to the IRS. The amount depends on how late you are, but ranges from $50 to over $500 per form.
What if I’m a contractor and don’t receive a 1099?
If you don’t receive the form by January 31, reach out to your customer and request one. You should report all your income on your tax return whether you get a 1099 or not.