by Matthew Cohen, CPA
In trying to navigate countless tax regulations, businesses and individuals often find themselves grappling with whether or not to issue 1099s.
The Internal Revenue Service (IRS) mandates that these forms be issued to report various types of payments including but not limited to non-employee compensation, interest, rents and cancellation of debt.
Who needs to receive a 1099?
The first step in complying with IRS regulations is to identify who needs to receive a 1099. Generally, an individual or entity that received $600 or more in income during the tax year must be issued a 1099. This includes independent contractors, freelancers, and other non-employee service providers. It is imperative to maintain accurate records of payments throughout the year to make a determination and streamline the filing process.
There are exceptions that allow forgoing issuance of 1099s. You do not need to issue 1099s to Corporations other than corporations that provide legal services. All legal service providers need to be issued 1099s if paid $600 or more per year.
In addition, if you pay the recipient via eligible electronic payments including by credit card, Venmo and PayPal, you do not need to issue 1099s. Keep in mind if you make payments to a recipient via electronic payment and by check, a 1099 should is required to be issued for the non-electronic payments.
Which 1099 form do I use?
There are different 1099s that are issued depending on which type of payment is being reported. If you are issuing a 1099 to a service provider you would use IRS form 1099-NEC (Non-Employee Compensation). If you are issuing a 1099 for rents or royalties, you would use IRS form 1099-MISC (Miscellaneous Income). If you are issuing a 1099 for interest paid, you would use IRS form 1099-INT.
There are several 1099s that report other types of payment that include dividend income, cancellation of debt income and proceeds from the sale of property. Be sure you confirm which form is correct for the payments you made prior to issuance and filing.
When are 1099s due?
Time is of the essence when it comes to issuing and filing 1099s. The due dates for the forms vary depending on the type of form. For example, 1099-NECs must be sent to recipients and filed with the IRS by February 1st. 1099-MISCs are due to the recipients by February 1st but the issuer has until March 31st to file with the IRS if done so electronically.
Due dates for other types of 1099s vary. Check with the IRS when the form you are preparing is due.
Be sure to check if the applicable State has a filing requirement as well. Also, be mindful of penalties and related interest for non-compliance. The IRS imposes fines for late or incorrect filings.
How do I get the recipient information needed to prepare a 1099?
The IRS requires that the issuer of a 1099 obtain an IRS form W-9. This form contains the information needed to prepare a 1099. A payee much include their name as it would appear on a tax return, type of business, mailing address and taxpayer ID number. The form must be signed and dated by the payee/recipient.
The issuer is required to obtain a W-9 prior to issuance of any payment. Aside from the requirement, this makes logical sense as it is easier to obtain a W-9 from someone waiting to be paid rather than after payment is made.
To be safe, you should obtain a W-9 prior to making payment and later determine if issuing a 1099 is necessary.
To summarize, any person or business paying a third party should have a protocol set up with regard to issuance of 1099s. This should include obtaining a W-9 from each payee at or near the beginning of the year. After year end, the payer can then determine how much each person or business was paid and whether or not they are required to issue 1099s.
Be sure to consult your tax adviser if necessary and if they do not prepare 1099s find an outside provider that does.
*This article was updated on February 7, 2024 relating to amount of payments reflected on forms.