For those of you who have a Schedule C (sole proprietorship) or a Schedule E (rental) on your 1040, or file a partnership, corporate, or non-profit return, you’ve no doubt been asked the question “Are you required to file 1099s?”. If you’ve ever had to answer “Yes” to that question without knowing how to file one, what information you’ll need, or what a 1099 even is, don’t fear—we’ll answer all of those questions.
Since 1917, the IRS has required businesses to report payments for services and rent on one form: the 1099. Over the years, the form has undergone a number of variations and bifurcations in order to better reflect the diverse income streams that exist. The two most important for business owners to know are the 1099-MISC and its recent variant, the 1099-NEC—a refinement introduced in 2020.
Of the numerous 1099s a person or entity may have to file, the 1099-MISC and the 1099-NEC are the two most common, and while the two share many similarities, and several filing requirements in common, there are several key distinctions that should help you differentiate which of these you need to file.
The 1099-MISC is now used to report various transactions, from rent and royalties to legal settlements. The “MISC” designation should be the main indicator that this form functions as a catch-all for the various payments you might make while operating a trade or business.
An abbreviated list of the main kinds of payments that might necessitate filing a 1099-MISC:
- Royalties paid in excess of $10
- Payments of any of the following make in excess of $600
- Prizes and awards
- Medical and health care payments made to providers
- Legal settlements
1099s should only be filed when the payments made are in connection to the function of your trade or business (which includes rental properties). Personal expenses—such as rental payments for a residence, or therapy—are not business expenses, and so do not require filing a 1099. Similarly, reimbursed expenses and credit cards don’t need to be included as part of the payments when filing the form.
The 1099-NEC, as mentioned, is a refinement of the 1099-MISC, and only needs to be filed for payments in excess of $600 that may be subject to self-employment tax. Essentially, if you paid a contractor or entity that is not an employee any amount greater than $600 for labor or services in connection to your trade or business, you’ll need to file a 1099-NEC. An easy way to remember this is keep in mind that NEC stands for non-employee compensation.
NB: Payments made to contractors used to be reported on the 1099-MISC, but because these comprised the majority of filings of the form itself, the IRS decided to introduce the 1099-NEC as a separate form.
The main filing requirement the two forms share in common is the payment threshold of $600 (except in the case of royalties). If you paid any person or entity $600 or more for a service of any kind while operating your trade or business, be it professional consultations or office rent to a landlord, you will have to file the correct 1099 form to then be issued to the compensated party. You don’t have to issue 1099s to corporations or LLCs that are taxed as corporations, the only exception being payments made to an attorney of $600 or more; these must be reported regardless of how they operate.
An important note: obtain all necessary payee information before making payments. If a payee does not provide you with a social security number (SSN) or employer identification number (EIN), the IRS requires a mandatory 28% backup withholding of the payment. If you fail to pay the backup withholding, the 28% may be assessed against you or your business. Using a W-9 form is a good way to obtain all of the necessary information you will need to file your 1099s.
Due to endemic underreporting of income, the IRS has been enforcing compliance by assessing penalties for failure to file these forms, so it is vital, if you are required to file a 1099, that you do so. More importantly, it is vital that you do so accurately, as both you, the taxpayer, and us, your tax preparer, sign returns under penalty of perjury. Most financial planning services offer help to taxpayers who need to file 1099s, and our firm is no different. We are more than happy to assist with the preparation of any and all 1099s you may need to file during the month of January. These forms must be sent to their respective recipients, as well as the IRS and state governments by January 31.
We hope this article was able to answer any of your questions regarding 1099s, but if you have a specific question, either regarding the filing process, or to engage our services in helping you to file your 1099s, feel free to reach out to our administrative staff for assistance.
If you have more general questions, you can visit IRS.gov for further information.