1099 IRS Requirements: Things you should know 

Dec 05, 2023

Every year as tax season approaches, several business owners consider the necessity to send 1099s to their vendors. 1099 are commonly known as 1099 form. Yet, despite their ubiquity, they remain one of the most misunderstood Internal Revenue Service (IRS) requirements. 

This vital tax form plays a crucial role in reporting non employment income, which encompasses a range of transactions from freelance services to interest earnings. Nonetheless, whether you are a business owner, independent contractor, or an individual taxpayer, it is equally important to understand the nuances of 1099 regulations.

Read on as we demystify everything you need to know about 1099 IRS requirement; so you can be well-informed and prepared for this tax obligation. However, be informed not to rely on this article for tax return preparation or advice. But rather consult an accountant or tax consultant/professional for guidance in your specific situation. 

What is an IRS Form 1099? 

An IRS Form 1099 is a series of tax form that shows different payment records made by an individual or business who is necessarily not your employer. This payment ranges from rental and royalties to dividends and distributions. 

It basically involves the payer filling out the form with the appropriate details, and then issuing the 1099 to you and the IRS. This is to ensure that all income is accurately reported for tax purposes. The 1099 form is also an essential tool that aids the IRS’s efforts in tracking income that might go unreported. 

Who Gets a 1099 Form? 

The IRS form 1099 can be issued to all kinds of people for several purposes. For example, independent contractors such as freelancers, gig worker, and consultants who typically fill out a W-9 Form at the beginning of a business relationship gets a 1099-NEC Form if they receive a payment of $600 or more in a year. 

The 1099 form comes with a space to input your Social Security Number (SSN) or Taxpayer Identification Number (TIN). This way, the IRS can track if you receive money and default in reporting the income in your tax return. 

Apart from independent contractors, non-corporation business structure may also require a 1099 form. This involves payments to businesses structured as Limited Liability Companies (LLCs) and partnerships. However, the 1099 form to be issued m depends on the type and amount of payment. 

Also, 1099-MISC Form is issued to individuals or entities receiving minimum payments of $600 for rents, prizes, awards, or other incomes. The same goes with recipient receiving over $10 from royalties or interest payments from financial institutions like banks. 

Where users of third-party payment apps like Venmo, and Paypal, etc receive payments of over $20,000 for goods and service, a 1099-K form will be required. However, this threshold has been proposed to change to $600 in the future. 

What are the Types of 1099 Forms? 

There are several types of 1099 forms. Here’s a breakdown of each one of them. 

1. 1099-NEC (Nonemployee Compensation): 

The form 1099-NEC is used for reporting incomes paid by a business to a non-employee. It is a new tax document that was formerly used back in 1982, but re-introduced in the 2020 tax year. Prior to this re-introduction, the Form 1099-MISC was typically filled by businesses to report payments from a trade or business of over $600 to a nonemployee. 

There are also some exceptions to the requirement for businesses to file a form 1099-NEC. This includes payments from merchandise, telephone, freight, telegrams, storage and related items. Likewise, payments made for rents to real estate agents and a tax-exempt organization are also exempted. 

The due date for the 1099-NEC form to be sent to the recipient and IRS is every 1st of February respectively. 

2. 1099-MISC (Miscellaneous Information): 

The IRS form 1099-MISC (formally miscellaneous income) unlike the 1099-NEC form, covers report on specified miscellaneous payments such as rent, prizes, awards, royalties, medical and health care payments. It consists of several boxes with the information required by the payee to file a U.S. tax return. Some of the boxes includes: 

Box 1: Rents

This box is only filled for amounts up to $600 or more. The payments to be recorded in this box ranges from real estate rentals for office space, machine rentals, and pasture rentals. 

Box 2: Royalties 

It is used for reporting royalties’ payment of over $10. These royalties range from oil, gas, or other mineral properties, and royalties on intellectual property. It also generally covers license fees for copyrights and trademarks. 

Box 3: Other income 

This Box includes income of $600 and above that can’t be reported into other boxes of the form. Some examples of incomes reported in this box includes payment from monetary prizes or awards, punitive damages or damages for nonphysical injuries or sickness, termination payments, and payments for a research study. 

Box 4: Federal income tax withheld

This box is where you report any backup withholding for a person yet to provide the necessary taxpayer identification number details. 

Box 7: Payer made direct sales of $5,000 or more

Firstly, dollar figures are not included in this box. This box is checked if you made direct sales of $5,000 or more of consumer products to a buyer for resale. 

Other 1099-MISC boxes

There are several other boxes remaining on the form 1099-MISC which covers specific types of payments. 

For example, Box 5 covers fishing boat proceeds, Box 6 is for medical and health care payments, and Box 8 for substitute payments in lieu of dividends or interest. The Boxes on the 1099-MISC box are up to 18 and if you’re confused on how to go about it, the back of the form provides an explanation of the types of payments to be reported in each box. 

For recipients, the due date for the 1099-MISC form is February 1st. However, if it includes substitute dividends or tax-exempt interest payments reportable by brokers, or gross proceeds paid to attorneys, the due date extends to February 16th. For the IRS, the deadline to file is February 28th if submitting by mail, or March 31st for electronic filings. 

3. 1099-A (Acquisition or Abandonment of Secured Property): 

If you're engaged in money-lending business, and you take over property that was used as security for a loan upon failure to satisfy the debt fully, or you find out that such property has been abandoned, you must file a Form 1099-A. This requirement also applies even if your main business operations is not lending of money. 

4. 1099-INT (Interest Income): 

The IRS Form 1099-INT is a document issued by financial institutions, like banks or brokerage firms, to report the interest income of $10 or more paid to an account holder by the bank or brokerage firm. This form also details any foreign taxes withheld on the interest income and any federal income taxes withheld under backup withholding rules. Essentially, it's a formal record to the IRS and the recipient about the interest earned on their accounts, ensuring accurate tax reporting. 

5. 1099-K (Payment Card and Third-Party Network Transactions): 

1099-K Form is used for reporting credit card payments and third-party payment processing, often for online retailers or e-commerce stores.
The IRS has postponed the new 1099-K reporting requirements to 2024. Initially set for 2022, the revised rules now propose a $5,000 threshold for the 2024 tax year, increasing from the planned $600 limit. This adjustment aims to better capture and report taxable income from third-party network transactions like PayPal, Venmo, or eBay. Previously, the threshold was set at over 200 transactions totaling more than $20,000. 

6. 1099-DIV (Dividends and Distributions): 

1099-DIV Forms are for dividends received from investments.

7. 1099-B (Proceeds from Broker and Barter Exchange Transactions): 

1099-B Form reports sales of stocks, bonds, derivatives, or other securities.

8. 1099-C (Cancellation of Debt): 

1099-C Form are issued when you negotiate a debt cancellation with a lender.

9. 1099-G (Certain Government Payments): 

1099-G Form reports unemployment compensation and state or local income tax refunds.

10. 1099-LTC (Long-Term Care and Accelerated Death Benefits): 

1099-LTC Form reports payments under long-term care insurance contracts and accelerated death benefits.

11. 1099-OID (Original Issue Discount): 

1099-OID Form are for income from bonds or CDs issued at a discount to the face value.

12. 1099-PATR (Taxable Distributions Received from Cooperatives): 

1099-PATR Form reports patronage dividends from cooperatives.

13. 1099-Q (Payment from Qualified Education Programs): 

1099-Q Form covers distributions from qualified education programs like 529 plans or Coverdell ESAs. 

14. 1099-R (Distributions from Pensions, Annuities, Retirement Plans, IRAs, or Insurance Contracts): 

1099-R Form are for distributions from retirement plans and IRAs.

15. 1099-S (Proceeds from Real Estate Transactions): 

1099-S Form are used for real estate transaction proceeds.

16. 1099-SA (Distributions From an HSA, Archer MSA, or Medicare Advantage MSA): 

1099-SA Form reports distributions from health savings accounts or medical savings accounts. 

What is the Deadline for Filing 1099s?

The deadline for sending out 1099 forms is typically January 31st of the year following the tax year. For electronic filings, the deadline might extend to March 31st. It’s important to stay updated with the IRS for any changes in filing deadlines.

Penalties for Non-Compliance

Failure to file accurate 1099 form in time can lead to heavy fines. These penalties vary depending on the delay in filling. Most especially for businesses, fines can be as much as tens of thousands of dollars.

How to File 1099 Forms

To file a 1099 form, these are all you need to do: 

Collect Required Information: This involves gathering information such as legal names, address, TINs, SSNs, and Employer Identification Number (EINs) from your contractors. For the purpose of accuracy, the standard procedure is to require each contractor to complete a Form W-9. Therefore, it is advisable to require independent contractors to complete the Form W-9 immediately after their engagement. After collecting the relevant information, use same to fill out the Form 1099-NEC

Select the accurate 1099 Form: This can be determined based on the type of income. 

Submit to the IRS: You need to submit copy A of the 1099-NEC to the IRS. This can be done electronically or by mail. However, note that if you file a physical Form 1099-NEC, you will not be able to download and submit an electronic version of Copy A from the IRS website. Rather, you would have to obtain a hardcopy Form 1099-NEC and mail same to the IRS.

Send Copies to Recipients: It is compulsory for contractors to receive the copy B of the Form 1099 before or on the expected deadline (January 31st). 

Conclusion

Understanding the 1099 IRS requirements is not merely about adhering to regulations; it's also about providing top-notch service to your clients. Staying informed and proactive helps you navigate these rules effectively.