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Dec 25 min read

What You Need to Know about 1099s


The end of the year can be a chaotic time for anyone. There are holiday preparations and celebrations. Bonuses to give, charitable donations to make, books to close. Whatever your business’s fiscal year, the tax year is coming to a close, and filing deadlines are drawing near. 


One of the most misunderstood forms for small and medium businesses owners is the 1099. And understandably so. There are 20 (or more) different 1099 forms, each with its own purpose. 


Here's what you need to know about 1099s. 

 


What is a 1099 form?  

A 1099 form is completed by businesses to inform the government of any payments made to vendors. This information is matched with reported income by independent contractors and businesses to ensure accuracy of reported income. A separate 1099 form is required for each vendor.  


This form is not used to pay taxes. The individual or business who receives a copy of the filed 1099 form is responsible for paying the necessary taxes. 


What is a Vendor? 

Any business or individual to whom payment is made for goods and/or services. This includes independent contractors, consultants, subcontractors, freelancers, certain broker payments, landlords, prizes and awards, royalties, medical payments (even to corporations), legal services, and more. 


Who needs to file a 1099?

Because there are 20 different forms, there are quite a number of reasons one would need to file a 1099. In fact, it might be easier to list those for whom you do NOT need to file a 1099:  

  • Utilities 

  • Corporations (unless the payment was for medical or legal services) 

  • The total payments to that business or individual was less than $600 (unless federal taxes were withheld) 

  • Food and tangible goods purchased (such as physical inventory) from a vendor 

  • Individuals paid who fall under the $600 threshold do not require a 1099 UNLESS federal tax was withheld.  


That said, any business that pays more than $600 in a given year for services provided by an individual or business is required to file a 1099. If your business paid independent contractors, freelancers, consultants, for rent, royalties, prizes, medical and health care payments, legal services, crop insurance proceeds, and fishing boat proceeds, and more, your business needs to file a 1099 for each vendor. 


In today’s digital marketing age, one interesting outlier that could affect your business is payment for royalties. A 1099 must be filed for only $10 in royalties paid verses the $600 threshold for other vendors.


Which forms need to be filed and when?

The two most common 1099 forms that a small or medium business will need to file are 1099-NEC and 1099-MISC. 


The 1099-NEC or Non-Employee Compensation is required for any payment made for work performed by a non-employee. This includes independent contractors, freelancers, consultants, and attorneys (but not legal services, see 1099-MISC). The amount paid should be $600 or more.  This form is due to both the vendor and the IRS by January 31 each year.


The 1099-MISC or Miscellaneous should be filed for certain broker payments, rent of $600 or more, prizes and awards, royalties, medical payments, and legal services.  

  • Gross proceeds paid to attorneys (e.g., settlements) go on 1099-MISC Box 10. 

  • 1099-MISC Box 6 is used for medical and health care payments, and these payments are an exception to the $600 threshold when made to corporations. 


This form is due to the recipient (vendor) by January 31 or February 15 (depending on the type of payment made) and due to the IRS February 28.


Again, this is not an exhaustive list, and depending on the type of business you do, a different 1099 may be required. It is a good idea to have a bookkeeper, tax preparer, or accountant look over your payments vendors to help determine the appropriate form required. 

 


Are there penalties for not filing, and what are they? 

Yes. The 2024 tax year penalties for not filing may vary from $60 to $330 per form depending on how late the form is filed. If a business fails to file at all, the penalty is $660 per form or 10% of the income reported with no maximum penalty. 

In addition, there are penalties for misfiling or misclassifying employees and vendors. Obtaining a W-9 from every vendor every year is your best defense against a misclassifying penalty. 

 








  1. Get a W-9. The information from the W-9 is what you will use to file the appropriate 1099. 

  2. It’s a good idea to get a vendor’s W-9 before a single payment is made to that vendor. 

  3. Keep a list or spreadsheet of vendors and whether you have received their W-9. 

  4. If you have not collected a W-9, now’s the time to do so. 

  5. A current, signed W-9 is your best protection from the possibility of misfiling a 1099. 

    1. Make sure you receive an updated W-9 every year. It is possible that the tax classification for an individual or business changed from previous years, so it is necessary to collect up-to-date information each year. 

  6. You can access the current version of the W-9 here. 

  7. Keep accurate records of all payments to vendors and the types of payments made. If different services are provided, it is possible that more than one 1099 will be necessary for a particular vendor, though this is not common. 

  8. Know how you will need to file. Starting in 2023, the government required anyone filing more than 10 forms to do so electronically. To do this, you must file the electronic version of the form. You cannot print the official PDF and upload it to the website. The form will be rejected, and you might be penalized. 

  9. It is possible that your bookkeeping software, bookkeeper, tax preparer, accountant, or even payroll will be able to file 1099s for you.  

    1. A note about payroll services: If your payroll company is willing to file 1099s for you, it may only be for vendors who are paid regularly, much like an employee. It is also possible that you will have to be careful how these payments are categorized, or else you will need to file a second 1099 for that vendor for other services rendered.  

  10. Document everything. While it is a low percentage of small businesses that get audited, it does still happen. Well-organized, thorough documentation is key for a clean audit and lack of penalties. 

 

A Few Resources for More Information 

 

 And, of course, if you don't already have a bookkeeper or would like a consultation on where to begin or how to proceed, we are here to help.



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