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What Small Businesses Need to Know About IRS Form 1099

Dock David Treece
Dock David Treece

If your business pays independent contractors or vendors for freelance work, rent, or other items, you'll need to fill out IRS Form 1099.

IRS Form 1099 is a document that businesses use to report the taxable payments they've made to vendors and independent contractors for service, rent, and other items. Freelancers and independent contractors receive this form for work they've performed during the year and use it to report their income to the IRS.

What is a 1099 form?

A 1099 form is a tax form that businesses use to report certain types of non-employee compensation – such as payment for professional services, royalties, interest, and awards or prizes – paid to other businesses and to individuals who aren't full-time employees of your company.

Businesses submit Form 1099 both to payees and directly to the IRS. However, the form only reports business-related compensation for intangibles like interest or services to other companies and people who are not your company's W-2 employees. It is not used to report payments for purchases like inventory or office supplies.

Types of 1099

When most people think of 1099s, what comes to mind is Form 1099-MISC – the form used to report miscellaneous payments for freelance and other contracted services provided to companies that don't employ the workers full time. But there are many types of 1099, each reporting different types of payment.

Here are five of the most common types of 1099:

  1. 1099-MISC: Businesses file this form for each individual they have paid during the year for miscellaneous services.
  2. 1099-INT: Financial institutions file this form to report the interest they paid account holders.
  3. 1099-DIV: Financial institutions file this form to report dividend payments and investment distributions.
  4. 1099-LTC: Insurance companies and government agencies file this form to report long-term care and accelerated death benefits paid out on life insurance policies.
  5. 1099-SA: Health insurance administrators file this form to report distributions from health savings accounts, Archer medical savings accounts or Medicare Advantage medical savings accounts.

The types of 1099s you complete (or receive, in the case of a payee) depend on the type of organization you have and the type of compensation you issue or receive throughout the year.

Who is required to fill out the 1099-MISC?

Any 1099s, including the 1099-MISC, are filled out by the business that is paying an individual or business for interest, services, dividends, or other relevant forms of compensation.

If you're a business owner – even an unincorporated sole proprietor – and you pay $600 or more throughout the year to a business or an individual who isn't a W-2 employee of your business, then you are required to complete a 1099-MISC to report payments to that business or individual.

Typically, business owners, managers or accountants complete the 1099. The form is only for businesses that are actively engaged in trade and make payments to non-employees totaling at least $600 in a calendar year.

Form 1099-MISC is most often used to report these types of compensation:

  • Payment to service-based businesses (such as IT consultants)
  • Payment to freelancers (like writers or graphic designers)
  • Interest paid on loans
  • Dividends paid to a business's shareholders

In cases like these, where total payments made to another company or individual exceed $600 in a calendar year – and the payments aren't covered by other tax reporting forms, like a W-2 – the company would need to prepare, send and file 1099s (even if it's just a sole proprietorship).

When are 1099 forms sent or issued to corporations?

1099s are used to report your payments to other companies as well as to individuals. Whether the recipient is an individual, sole proprietorship, LLC, S-corp, or C-corp, any entity that your business pays more than $600 in a year for services, rent, interest, awards, or other intangibles must be sent a 1099 that documents their compensation for the year.

You don't have to file a 1099 when the only payments you issued to another company were for the purchase, transport, or storage of tangible goods like inventory.

When do you file the 1099 form?

If you aren't engaged in business – or if your only service-related expenses don't exceed $600 in a year – then you don't need to prepare 1099s.

When your business does have payees who must be sent 1099s, you must prepare and send these forms to them no later than Jan. 31 each year. You must then file the forms with the IRS no later than Feb. 28 (or March 31 if you file electronically).

If you receive a Form 1099 from a client or employer, you'll need to include the information from the form on your normal tax return, filed on or before April 15 (or Oct. 15 if you request an extension).

How to file Form 1099

If you have to prepare 1099s for various payees each year, you'll follow four basic steps.

1. Identify eligible payees.

The first thing to do is to review your financial records and identify those payees to whom you must send 1099s. Look for people and companies you paid more than $600 over the course of the year for rent, services, interest and dividends. Eliminate any full-time employees whose compensation will be reported on the W-2 you send them for that year.

2. Complete 1099s.

Once you determine who needs 1099s from you, you'll need to download Form 1099 from the IRS and fill it out with the payee's information. You should have used Form W-9 to get this information (like their tax ID number) when you hired them.

3. Send 1099s.

After you complete Form 1099 for all relevant payees, send the forms to them no later than Jan. 31.

4. File 1099s with IRS.

After you send the 1099s to payees to report their income, you need to file the forms with the IRS no later than Feb. 28 (March 31 if you file them electronically). Be sure to keep a copy for your records.

What do freelancers and independent contractors do with 1099s?

If you're the one receiving a 1099 – for instance, if you're an independent contractor rather than a W-2 employee – this form reports the payments you've received during the year, and you'll use it to complete your tax returns. [Read related article: Tax-Filing Tips for Independent Contractors]

When you receive a 1099 from a client or employer, you'll need to review several important items:

  • Payer info: This line will show who paid you.
  • Recipient TIN: Make sure this number matches your Social Security number (or your tax ID number if you're incorporated).
  • Recipient name: This should be your name or that of your company.
  • Boxes 1-17: These boxes show the compensation paid to you and any taxes already withheld.

Then, all you have to do is use the information on your 1099 to complete your tax returns and keep a copy of the form for your records.

What if I get 1099s and a W-2?

Some individuals may earn both a 1099 and a W-2 income in the same year. These are some cases where this is common:

  • You have a full-time job and do freelance work on the side.
  • You work at a hospital and moonlight at a clinic.
  • You have one or more clients who use a professional employer organization (PEO) to pay their contractors.

If you receive both a 1099 and a W-2, you'll use both forms to prepare your income taxes. Enter any income reported on your W-2 directly in line 1 of your Form 1040. 1099 income, on the other hand, is usually reported on a Schedule C.

What if I don't get a 1099?

If you work for an employer as an independent contractor and don't receive a 1099 in January of the year following your work, you still have to report your income.

The first thing to do is contact the company to see if there was a clerical error – the company may have gotten your information wrong or even sent the form to the wrong address. In any case, ask the employer to resend the 1099 so you can get an accurate accounting of your income from the company throughout the year.

Whether the company resends your 1099 or not, you still need to report any compensation on your tax returns. If you can't get an accurate 1099, you may need to reconstruct your compensation data using your own bank records. The employer probably won't have withheld any taxes from your payments, so you should assume that any payments it issued to you were taxable. Then, you'll need to deduct any eligible business expenses on your own. [Read related article: Self-Employed? Everything You Need to Know About Taxes]

Image Credit: alfexe / Getty Images
Dock David Treece
Dock David Treece Contributing Writer
Dock David Treece is a contributor who has written extensively about business finance, including SBA loans and alternative lending. He previously worked as a financial advisor and registered investment advisor, as well as served on the FINRA Small Firm Advisory Board. He previously held FINRA Series 7, 24, 27, and 66 licenses.