By Steven Gamboa and Pavan Rajput
Remaining compliant with IRS guidelines and regulations is essential for any individual and business. Forms 1099 play a major role during tax preparation since they are a resource for the IRS to verify the accuracy of income being reported. It is important to have proper guidance regarding 1099 filing requirements and deadlines since it could potentially impact your own tax filings and those of others within your business network. The summary below outlines the purpose of a Form 1099, how to recognize if any 1099s required to be filed on your behalf, and the necessary steps to report income if you receive a 1099.
Form 1099 Overview
Form 1099 is an informational tax document which reports certain financial transactions that occurred during the year. Under federal law, individuals and businesses are required to issue a 1099 to any independent contractor to whom they have paid more than $600 throughout the year. In general, you are required to issue 1099-NEC and/or 1099-MISC forms to non-employees (independent contractors, partnerships, LLCs, etc.) who were paid $600 or more for services they provided to your business (like cleaning services, IT support, repairs and maintenance, accounting, consulting, etc., and also rent and royalties).
You would not issue form 1099-MISC to (a) corporations, including LLCs treated as an S-Corp. or C-Corp., with the exception of payments for legal services; or (b) to vendors for payments for merchandise, freight, storage, and similar items. Payment made with a credit card will also be excluded from form 1099-NEC and 1099-MISC.
Independent contractors, who are usually paid on a per-job basis, normally do not have any taxes withheld throughout the year. Therefore, using the compensation reported on the Form 1099 they are able calculate how much tax they owe when preparing their tax returns.
Do I Need to File a 1099?
It is very important to keep in mind that 1099s are only used to report compensation paid to independent contractors who perform services that are exclusively for a trade or business. A 1099 is not required for personal/household services such as gardening and babysitting.
If a 1099 is required to be filed on your behalf, it is your responsibility to gather the independent contractor’s personal tax information to accurately complete the Form 1099.
Form W-9, Request for Taxpayer Identification Number and Certification, needs to be completed by the independent contractor who is being compensated. Form W-9 will include all the necessary tax information to report a payment on a Form 1099 including the name of the independent contractor and their Social Security Number (SSN) or Employer Identification Number (EIN).
1099-NEC vs 1099-MISC
Beginning with the 2020 tax year, Form 1099-NEC is strictly used to report compensation over $600 paid to independent contractors. NEC is an abbreviation for non-employee compensation.
In previous years, non-employee compensation was reported on Form 1099-MISC. Form 1099-MISC is typically used to report rent payments, royalties, and awards/prizes received.
Form 1099-NEC, which must be filed by January 31st, was introduced to provide more transparency in relation to the due dates for 1099s. Prior to the introduction of the new 1099 form, businesses who filed Form 1099-MISC reporting non-employee compensation were required to issue them by January 31st. The remaining Forms 1099-MISC, which did not include non-employee compensation, were not due until February 28th which often created confusion. The due date for the new Form 1099-NEC was selected to match the due date for W-2s, which report wages and tax withholdings for employees on a company payroll and are typically also due on January 31st.
What Happens if I Receive a 1099?
Since the IRS receives a copy of every filed 1099, in the event a 1099 is issued with your SSN or EIN in the recipient’s TIN box, it is extremely important for the income to be reported on your tax return for the corresponding year indicated on the top right of the form.
Tax Treatment of 1099 Income
In most cases if you receive 1099-NEC you are considered to be self-employed and will be required to pay self-employment taxes. Currently, the self-employment tax rate is 15.3% and is made up of Social Security and Medicare taxes. Self-employed individuals are required to report their 1099 income using Schedule C, Profit or Loss from Business, when filing their income tax return. However, be mindful that although you may receive a 1099-NEC, you are not necessarily required to pay self-employment taxes on the entire amount reported on the form. Business expenses can also be included on Schedule C to offset the reported income and to compute total self-employment net earnings. This is important to consider since self-employment taxes are only paid on self-employment net earnings of $400 or more.
With the implementation of Form 1099-NEC, which as previously mentioned is exclusively used to report non-employee compensation, income reported on Form 1099-MISC is likely not subject to self-employment taxes. Nonetheless, this income is still required to be reported and taxed as ordinary income. 1099-MISC income such as rents and royalties should be reported using Schedule E, Supplemental Income and Loss, when filing your tax return. Similar to the 1099-NEC, you are not necessarily required to pay taxes on the entire amount reported on the form since expenses can be utilized to reduce the net profit and amount of taxes paid.
The following deadlines are in effect for Forms 1099 related to the 2023 tax year:
|Electronic Filing Deadline
|Paper Filing Deadline
Late Filing Penalties
Failure to timely file Forms 1099 can result in penalties ranging from $60 to $630 per form. The following penalties can be imposed for failure to file by the corresponding deadline:
|$60 per 1099
|Within 30 days of due date
|$220,500 – $630,500
|$120 per 1099
|More than 30 days after due date but before August 1st
|$630,500 – $1,891,500
|$310 per 1099
|Any time after August 1st
|$1,261,000 – $3,783,000
|$630 per 1099
|No Filing Due to Intentional Disregard
|No Maximum Penalty
The maximum applicable penalty ranges depending on whether the IRS considers you a small business ($5 million or less in average annual revenues for the previous three years).
Form 1096 Overview
Form 1096, Annual Summary and Transmittal of U.S. Information Returns is a summary document submitted to the IRS when filing informational returns such as 1099s. This summary provides details about the 1099s being filed and allows for information including the total number of forms filed and total amounts reported to be learned by just looking at a one-page document.
A separate Form 1096 is required for each type of informational return being filed. Therefore, if you are issuing both a 1099-NEC and 1099-MISC, then you are required to file two separate Forms 1096 – one for each type of return.
Changes Effective For 2023 Tax Year
New regulations implemented by the IRS state all filers who issue ten or more Forms 1099 will be required to file the forms electronically. Filers who do not comply with the electronic filing requirement will be subject to a “Failure to File Information Returns on Magnetic Media” penalty from the IRS which is equal to $250 per each paper filed Form 1099. This is a significant decrease from the previous threshold which only required electronic filing for 250 forms or more.
The IRS is also requiring all corrected Forms 1099 to be submitted in the same format as the original submission. For example, if a third-party vendor filed Forms 1099 electronically and corrections are required, the corrections must be filed electronically and cannot be submitted on paper or penalties will be assessed.
Current guidelines state third-party platforms such as Venmo and PayPal are only required to issue a Form 1099-K to merchants whose total transactions exceed 200 and the total amount of reportable payments exceed $20,000 in a calendar year.
The IRS previously attempted to implement a threshold of $600 total reportable payments for the 2023 tax year but backtracked in November 2023 and instead proposed a new phase-in threshold of $5,000 which is expected to be implemented starting with the 2024 tax year.