It's tax season, which means small business owners should be thinking about 1099s!
For the new business owners in the room - A Form 1099 is a form that is used to report the payment of funds to a person or business. The form is provided to both the recipient of the funds and the IRS.
Small Business owners receive and send these forms as applicable.
Ok - So what action should be taken?
As a small business owner, you need to analyze whether you need to send Form 1099 to your vendors/contractors/clients and then send them out before the January 31, 2024 deadline.
You will likely also be receiving 1099 forms reporting the income your business earned if you are not an exception to the rule. Save the forms you receive and provide them to your tax accountant.
If you are being 1099'd for more than you were paid or expect to report as taxable income, you should work to document the reason for the difference and, if necessary, clear up the error, as the IRS will have record of the amount for which you were 1099'd.
Which Form 1099 do I send and to whom?
Of course, there is more than one Form 1099. Why not? With all the different 1099 forms, it can get confusing.
Here's a quick guide to the most common Form 1099s small businesses are impacted by:
1099-NEC
This form reports nonemployee compensation over $600 paid to freelancers, independent contractors, attorneys, etc. It's one of the most common 1099s small businesses send out.
1099-MISC
This form reports miscellaneous income over $600 that doesn't fit into other 1099 categories.
Common uses include reporting rent or royalty payments. You must send a 1099-MISC to those you paid rent of over $600 or royalties of over $10.
(Side note - YES - You need to 1099 the entity you pay rent to! Even/Especially if that entity is a related party!)
1099-K
Payment processors like PayPal now issue this form to report business payments over $600. You may get both a 1099-K and 1099-NEC for the same income.
That being said, SMALL BUSINESSES DO NOT ISSUE FORM 1099-K.The payment processor has the requirement to file. Because of this form - YOU ARE ALSO NOT REQUIRED TO SEND A 1099-NEC TO CONTRACTORS OR VENDORS YOU PAID VIA A CREDIT CARD OR PAYMENT PROCESSOR.
NOTE: This narrative does not provide an exhaustive list of Form 1099 requirements.
If you receive or issue payment in certain transactions (e.g. real estate settlement, legal case settlement, etc) you should consult an accountant and the Instructions below to determine what your obligations are with regards to Form 1099 reporting.
Form 1099 Instructions:
https://www.irs.gov/instructions/i1099gi
Are there exceptions to these rules?
YEP! The following exceptions do not need to be sent a Form 1099.
Exceptions are as follows:
- Businesses that are incorporated as an S Corporation or a C Corporation
- Limited Liability Companies (LLCs) taxed as C Corporations or S Corporations
- Businesses that sell merchandise or provide storage, freight, or other similar things/services
- Payments made via a credit card or payment processor (as discussed above)
It may go without saying, but you do not need to 1099 your employees for which you pay payroll taxes. They receive W-2s.
There are more details of exceptions at the link below:
https://www.irs.gov/instructions/i1099mec
How Do I Obtain the Information to Send a Form 1099?
Simply put - a Form W-9.
To obtain the information necessary to file a Form 1099 or determine if your vendors meet the exceptions, you need to request a W-9 for all of those to whom you pay over $600, so that you can determine, via the information in that form, whether you need to 1099 them.
A good practice is to request a W-9 prior to payment. If you have missed out on that opportunity or if you want to ensure strong controls around this, we recommend that you run reports of all vendors over $600 in payment as of the end of the year and send out a W-9 request ASAP to meet the deadlines detailed below. In some cases, if you have contractors AND w-2 employees, you might even be able to streamline contractor payment with your payroll provider. Online payroll companies, such as Gusto, allow you to build out this reporting and payment cadence so that you do not have to worry about it at year end.
A link to the current template for the IRS Form W-9 is below:
https://www.irs.gov/pub/irs-pdf/fw9.pdf
What are the Deadlines? Are there Penalties?
The IRS has a January 31, 2024 reporting deadline for Form 1099-MISC and Form 1099-NEC. These forms, when reporting non-employee compensation to independent contractors, must be received by recipients and filed with the IRS by that date. Various other due dates related to Form 1099-MISC, Form 1099-K and Form 1099-NEC, including dates due to the IRS, can be found on the forms' instructions.
Penalties range from $60-$ for 630 for late or incorrect filings. Interest can also be charged on penalties.
Where and How Do I Prepare These Forms?
You can order the official paper forms in advance at the link below.
https://www.irs.gov/businesses/online-ordering-for-information-returns-and-employer-returns
If you are reading this in January, however, I would not recommend ordering forms or pulling out the typewriter. Instead, I would recommend that you work with your bookkeeper, your accounting software (like Quickbooks) and/or the IRS online filing program (https://www.irs.gov/filing/e-file-forms-1099-with-iris) or online 1099 software such as Track 1099( www.track1099.com ), which help you complete the forms, e-file the forms, and mail them for you. Such softwares might also help you with any state reporting requirements.
Get Started!
Ok - now you know what you should be doing. Get to it - 1099 forms keep your business tax-compliant and keep you from penalties. Don't bury your head in the sand thinking that they don't matter.
The tax professionals at Pennywise Tax Strategies can guide you through the 1099 filing requirements and make sure your small business avoids penalties. We can also provide advice on the best accounting software and systems to simplify 1099 management.