Tax season is upon us! For many business owners, sending out the 1099 form is a necessity that must be completed soon. Many business owners, however, wonder whether they must send them out to vendors. They aren’t necessarily sure of all of the required items they need to follow. Learn more about what you need to know about the 1099 form with A Business Guide to Sending 1099’s. We will also along share all the details below to avoid the confusion this year!
What is a 1099 Form?
The 1099 forms are used for NON-EMPLOYEE compensation. Specifically if you use independent contractors, freelancers, or single-job experts that are hired out for work on occasion.
You will be required to send out a 1099 form for these individuals you work with, instead of a W2 form. That is what you will send out for employees of your business.
Who Receives a 1099 Form?
Different 1099 forms are used for a variety of reasons, but the most common forms are the 1099-NEC and the 1099-MISC.
As a common rule of thumb, if you have paid any part-time worker or freelancer more than $600 during the year, you will need to send them a 1099 form. This will allow you to report the wage information to the IRS. It also allows your associates to do their own taxes. This could include graphic designers, social media experts, or virtual assistants that you don’t have on your business’ payroll full-time.
The 1099-NEC form is used for non-employee compensation, such as:
- Non-employee income over $600 paid to independent contractors and freelancers, self-employed people and 1099 employees
- Commissions
- Benefits
- Attorney fees (not services)
The 1099-MISC form is used for information that would be related to different miscellaneous income types, such as:
- $10 or more paid for:
- Royalties
- Broker payments instead of tax-exempt interest or dividends
- $600 or more paid for:
- Fishing boat proceeds
- Non-qualified deferred compensation
- Crop insurance proceeds
- Rents
- Prizes and awards
- Medical and healthcare payments
- Attorney services (not fees)
- Cash from a notional principal contract
- Purchasing fish for resale
It should also be noted that starting for the 2022 tax year, credit card companies and payment apps (PayPal, Venmo, CashApp, etc.) must send 1099-K forms to self-employed individuals and small businesses that received payments totaling $600 or more through their platforms. This is a new requirement that may cause some confusion. Therefore, it is best to be proactive about what it may mean for potential issues (for one thing, potentially double-counting income from a 1099-K and 1099-NEC form).
What Is The Deadline to Send Out 1099’s?
It’s never too early to begin learning about the process and working it into your schedule. However, the official deadline for the 1099 form to be sent out to service providers and contractors is January 31st. Business must also submit copies of these forms to the IRS:
- The IRS filing date for 1099-NEC is January 31st
- The IRS filing date for the 1099-MISC is February 28th (if filing by paper) or March 31st (if filing electronically)
This gives business owners several weeks to correct any errors in the 1099s sent out in January, before they get sent to the IRS. If there is a mistake that is made and a corrected 1099 is required, the steps to fix the 1099 are surprisingly easy. Simply make the correction on a new form and check the “Corrected” box at the top of the tax form.
Also, make sure you check your state’s tax filing rules, as some also require receipt of the business’ 1099’s.
Can Businesses Get Extensions to Send Out 1099’s?
Running out of time to submit your 1099s? You can request an extension. However, you’ll need to submit a request for two extensions: one for sending out the 1099s to contractors and one for your IRS filing. The extension letter must be postmarked by January 31st and if approved, you likely won’t get more than an extra 30 days to send the forms out.
Your letter must include the name, TIN, address and signature of the payer, as well as the type of return, a statement that the extension is being requested to provide statements to recipients and the reason for the delay.
Consequences If You Don’t Send 1099s Out By Deadline
Sending out the required 1099 forms could cost your business if you don’t make the deadline. Penalties currently vary from $50 to $280, depending on how late you are past the deadline.
The amount of the penalty will be based on how late the filing is, along with how many 1099’s are filed, as well as the size of your business. Small and large businesses are handled differently. If you do not file your required 1099s at all, the IRS may impose additional penalties.
For instance, the maximum fine per tax year for businesses that do not issue 1099 forms is $556,500. However, if the businesses ignore their responsibility to send these forms, the minimum fine is $550 or at least 10% of the income that should be reported in the form, and the IRS does not have a maximum fine limit.
Can Contractors be Penalized if the 1099 Form Isn’t Sent By Deadline?
In short, no. Contractors aren’t responsible for missing 1099 forms that aren’t sent out by the deadline and won’t be penalized. However, the income must be reported by them, either way. They can report income by using the information reported on their own records. The business they worked with are the ones more likely to be penalized for not sending out the 1099 form to begin with, because the onus is on the payer to issue the form.
Contractors can use documents like receipts and invoices from payments and transactions, along with profit and loss statements and bank accounts to help provide the information they need to file their own taxes. The only thing a contractor WILL get penalized for is if they don’t report the income at all and end up with a larger tax liability than originally disclosed.
What Can A Contractor Do If A Business They Contracted With Doesn’t Send Out 1099s By The Deadline?
There are a few reasons a contractor may not receive their 1099 by the deadline. To begin with, ensure the following things didn’t happen:
- A contractor earned less than $600, which a 1099 wouldn’t be required to be filed for
- The 1099 may have been lost in the mail or
- The contractor has the wrong employee address
If a contractor has not received an expected 1099 a few days after the deadline, they should contact the payer (the business) to make sure it was sent or to see if something was wrong on the form (like the address). If they still don’t receive a from by February 15th, employees are encouraged to call the IRS for help at 1-800-829-1040.
When a business is caught intentionally not providing a payee with a correct statement for the year (or not providing one at all), an “Intentional Disregard” penalty could be handed to the business, which is $570 at a minimum, with no max penalty. Three criteria must be met for the IRS to prove that there was intentional disregard, but if they meet those standards, they will impose the penalty, where there is no cap on the final amount that can potentially be imposed on the business.
As always, make sure you follow-up with a tax professional. Ensure you have everything completed that is required of you. Remember that tax laws and processes change over time, so head over to the IRS website to find any updates that may have been made. Hopefully this helped to clear up some of the most misunderstood items around the 1099 form and will help you to manage the process.