The Form 1099 rules can get complicated - staying compliant doesn’t have to be. Many business owners aren’t sure of the best practices when issuing a Form 1099. Get to know the rules and learn how to avoid common mistakes when issuing a Form 1099.
To keep it simple we've focused on Form 1099-MISC for this article and at the end have added some information on different types of Form 1099s towards the end.
WHEN SHOULD I GIVE SOMEONE A FORM 1099-MISC?
The Form 1099-MISC must be sent to any individual, limited liability company (except LLC’s taxed as a C-Corporation or S-Corporation), partnership, limited partnership, limited liability partnership, estate or trust if you paid $600 or more typically under the following circumstances:
- Services that were performed by an independent contractor or others that were not employees of your business
- Prizes or awards
- Rent (unless you are paying rent to a real estate agent or property manager on behalf of the property owner – if you are unsure, issue them a 1099 form)
- Royalties ($10 or more)
- Backup withholding or federal income tax withheld (any amount)
- Attorney (any amount)
A Form 1099 only needs to be issued for direct payments made by cash, check, EFT, ACH, wire, etc. Any payment made indirectly, for example through a credit card, does not need to be reported on a Form 1099.
You are not required to file a Form 1099 if you are not engaged in a trade or business. If you are engaged in a trade or business AND the sum of all payments you’ve made to an individual or unincorporated business is less than $600 for the tax year (except to attorneys or law firms) a Form 1099 is not required.
WHAT IS THE DUE DATE?
Form 1099-MISC must be furnished to each recipient and the Internal Revenue Service by January 31st.
USING W9S AS A PAYMENT TOOL
Form W9 is used to request a taxpayer’s social security or taxpayer identification number (you need this information to issue them a Form 1099). As a best practice, we recommend that you collect a Form W9 from each person or company you send a payment to – this will make the Form 1099 process at year-end simple and efficient.
Issuing 1099s by the correct due date is imperative to avoid being charged a penalty for failure to file by the due date. There are other types of penalties too, including failure to correct a 1099. The penalties vary and typically range from $50 to $260 per 1099.
DIFFERENT TYPES OF 1099S
A different type of Form 1099 must be filed if you made payments under the following circumstances:
- Interest on a business debt to someone (Form 1099-INT)
- Dividends or other distributions to a company shareholder (Form 1099-DIV)
- Distribution from a retirement or profit plan or from an IRA or insurance contract (Form 1099-R)
You might have to issue the same person different types of 1099s (for example, if you paid an individual shareholder interest for a loan, it would be reported on Form 1099-INT, and if you also paid them dividends on their investment in the corporation it would be reported on Form 1099-DIV).