Basics About 1099 Forms for Small Business Owners

what is a 1099 form

As a small business owner or independent contractor, you probably already know at least a little about 1099 forms.

However, you may still have unanswered questions. To whom do these forms apply? How do you fill them out? Who should issue them? If you need one, when do they arrive?

Read on to discover the answers to these questions and several others that you may have about 1099 forms.

What is a 1099 Form?

A 1099 form reports money that was not received from an employer such as stock dividends or independent contractor income. These forms are similar to the W2 forms businesses issue to their employees. Recipients must complete 1099 forms and submit them to the IRS by January 31.

Several variations of this form exist for different circumstances. The two that are used by businesses the most are the 1099 NEC and 1099 MISC forms. In the past, non-employee payments to independent contractors were recorded on a 1099 MISC on line 7. However, the newer 1099 NEC forms absorbed these costs in 2020. The NEC in 1099 NEC stands for Non-Employee Compensation. These forms report:

  • Non-employee income over $600 paid to independent contractors and freelancers, self-employed people, and 1099 employees
  • Commissions
  • Benefits
  • Attorney fees (not services)

You do not have to use a 1099 NEC for independent contractors that identify as an S or C corporation. Also, you only need to file them for business purposes, not personal services.

The 1099 MISC formerly stood for Miscellaneous Income, but now means Miscellaneous Information. It has a wide range of purposes and encompasses aspects that not covered by other 1099s. These include:

$10 or more paid for:

  • Royalties
  • Broker payments instead of tax-exempt interest or dividends

$600 or more paid for:

  • Fishing boat proceeds
  • Non-qualified deferred compensation
  • Crop insurance proceeds
  • Rents
  • Prizes and awards
  • Medical and healthcare payments
  • Attorney services (not fees)
  • Cash from a notional principal contract
  • purchasing fish for resale

How Do You Fill Out a 1099 NEC Form?

To fill out a 1099 form, a business needs four pieces of information:

  • Payer’s information
  • Payee’s information
  • Nonemployee compensation amount
  • Tax information

The first box contains the paying business’s information. There is only one box for this information, and you must include your name and business name, street address, and phone number.

The second section is for the paid contractor’s information. To obtain this, the payer will send the payee a W-9 form requesting their name, address, and tax identification number (TIN). However, if the contractor is not a U.S. resident, you will need a W-8BEN or W-8BEN 9 to certify that they reside outside the country. The easiest method for obtaining this information is to maintain these forms on-hand for all the contractors you work with.

After you have filled out these sections, input the compensation amount that the contractor received during the tax year.

How Do You Submit a 1099 NEC Form?

Once you’ve completed the Federal 1099 form, check your state’s 1099 form requirements. Some states require you to submit them, while others don’t.

To meet federal requirements, you must send out two copies, which must arrive at their locations by January 31. The detailed procedures for filing each of these are explained on the 1099 form’s first page.

Copy A goes to the IRS, and you can submit it either by mail or electronically. However, you can’t fill out a paper form, upload it, and then file it electronically. Paper copies must be mailed out, while electronic documents must be filled out using compatible accounting software through the IRS Filing a Return Electronically (FIRE) system.

Copy B goes to the contractor. This copy must be printed and mailed, or you can email it with the contractor’s permission. To obtain the contractor’s permission, the consent form must include:

  • An understanding that the contractor can choose between an emailed copy or a paper one
  • The year or years to which this consent applies
  • The instructions for requesting a paper copy in addition to the emailed one
  • The procedures for withdrawing consent
  • The conditions required to receive a 1099 form
  • A description of how to view and print the document
  • A date when the form will no longer be available

The paying business is responsible for sending 1099 NEC forms to contractors. However, if you fail to do so, the contractor must report that income anyway. You may not think the government will know, but the IRS can track your spending. If you have spent significantly more money than you have reported, they will audit you. Failing an audit can result in severe fines and even jail time.

Taxes are due April 15 each year. If 1099 forms arrive late, the following fees will apply:

  • $50 for the first 30 days
  • $100 after the first 30 days, but only if they are before August 1st
  • $260 on or after August 1st

If you choose not to file, you could receive a minimum penalty of $530 per 1099 with no maximum limit.

For businesses that work with several contractors, hiring a professional to help with the long process of filing 1099 forms can save you a lot of time and stress.

What are Some Other Variations of the 1099 Form?

Aside from the MISC and NEC versions, there are 18 other types of 1099 forms. The form setups are similar, but their purposes vary. Here are some of the most common variations:

  • 1099 INT: sent by banks, brokerage firms, and other investment firms to taxpayers with more than $10 in interest – download the 1099-INT form here.
  • 1099 DIV: received by investors for cash dividends, which are paid by corporations to reward them for purchasing their stock – download the 1099-DIV form here.
  • 1099 G: for those who collect unemployment or a local tax refund – download the 1099-G form here.
  • 1099 R: issued for taxable pension retirement plans or individual retirement account (IRA) payouts as well as certain life insurance plans and annuities – download the 1099-R form here.
  • 1099 B: sent by a broker for commodities, stock sales, certain types of bartering, and other securities – download the 1099-B form here.
  • 1099 S: used for real estate transactions that gain money, including the sales of land, residential properties, and commercial or industrial properties. This could be tax-exempt, so consult a professional – download the 1099-S form here.

These forms also have a copy A and a copy B, and these must be received by the IRS and the other recipients by January 31st.

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Joshua Sophy Joshua Sophy is the Editor for Small Business Trends and the Head of Content Partnerships. A journalist with 20 years of experience in traditional and online media, he is a member of the Society of Professional Journalists. He founded his own local newspaper, the Pottsville Free Press, covering his hometown.

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