An important aspect of tax compliance for business owners is the requirement to file a 1099 for certain payments made during the normal course of business. If you are a business owner, below is a summary of what you need to know.
What is a 1099?
A 1099 is an IRS form that tells the IRS who has received payments from your business. The purpose of the form is to allow the IRS to match payments made by your business to the income reported on the recipient’s tax return. The two most common types of 1099 forms are 1099-NEC and 1099-MISC.
What payments are reported on a 1099-NEC?
Form 1099-NEC was reintroduced for the year 2020 and replaces Box 7 of the 1099-MISC. “NEC” stands for non-employee compensation.
Businesses that have made payments of $600 or more during the year to independent contractors, sole proprietors, LLCs, or partnerships for services performed during the normal course of business generally must file a 1099-NEC.
What payments are reported on a 1099-MISC?
While the 1099-NEC has replaced the 1099-MISC for payment related to services provided by non-employees, the 1099-MISC is still required for other payments, such as:
- Rent (but see below for an exception).
- Medical and health care payments.
- Payments to an attorney.
Note that 1099’s are only required for business payments, not personal expenses.
I paid a corporation or an S-corporation. Do I need to file a 1099?
If your payment is made to a corporation, you typically do not need to file a 1099.
To determine if you are paying a corporation, request a completed W-9 form. On this form, the payee will provide their name, address, Tax ID number, and federal tax classification. If the recipient indicates that they are a C corporation, an S corporation, or an LLC taxed as a corporation, a 1099 form will generally not be required.
Of course, there are several exceptions. The most common exception is for payments made to an attorney or law firm. Even if the attorney is taxed as a corporation, a 1099 must be filed.
What payments do NOT need to be reported on a 1099?
You do not need to file a 1099 for the following types of payments:
- Rent paid to a management company. The management company itself will file a 1099 form for the property owner.
- Payments made to employees. These need to be reported on a W-2.
- Payments for merchandise, freight, storage, and similar items.
- Cable, internet, phone, electricity, and other utilities.
When are 1099’s due?
Employers must provide a copy to the recipient and file 1099’s with the IRS by January 31st.
What happens if I don’t file?
If you don’t file or provide a copy to a recipient, you may face penalties. The penalty starts at $50 per missed or late 1099 if you’re less than 30 days late, and quickly climb to $260 per form.
Do I need to file these forms myself?
If you need assistance preparing and filing one or more 1099s and you have not already engaged our firm to do so, visit https://schanelcpa.com/client-resources/ and download our 1099 Data Collection Form. Instructions for completing the form and transmitting it back to us are included on the spreadsheet.