How to File 1099 Taxes? Learn to Issue 1099 to Contractor

What Is a 1099 Form?

A 1099 Form is a kind of document that professionals use to file taxes related to non-salary income with the IRS. The core use of it is to report multiple types of non-employment income to the Internal Revenue Service (IRS).

Businesses issue 1099 Forms to taxpayers who receive at least $600 or higher than this amount. These taxpayers can be freelancers, independent contractors, or self-employed people. This form is useful for the IRS to track taxable income that was not reported on the W-2.

Example of 1099 Form for Small Business

Suppose your manufacturing unit needs to have a little bit of modification in terms of the interior. For this, you hire a local interior design contractor who works solo and does not run a corporate firm.

Once you rendered the services, you made a payment of $7,000. Now, you will need an independent contractor 1099 form for your contractor, reflecting the amount you paid with service details. Additionally, you will also need to share a copy of the same with the IRS.

In case you hire any corporate firm for the same work, you will not be required to send a 1099 Form in this case.

Types of 1099s

There are several types of 1099s. The distinguishing is on the basis of type of income.

1099-NEC

The 1099-NEC (Non-Employee Compensation) form is useful to report any payment given to non-employees for their service. This form is given to those who work independently for the company and make $600 or above in the year.

1099-K

Form 1099-K is usually sent when the payment is made by third-party apps like Venmo, Credit Card Payment & PayPal. The main use of such forms is for transactions that are more than $600 in the year.

1099-INT

This form is useful for reporting the interest income that is earned from the financial institution and banks.

1099-DIV

Financial institutions issue this type of form to earn dividend income from the investment. The form of this dividend is cash.

1099-G

Some people receive money from the state, local, and federal governments, and this kind of form is sent to those. Also, a 1099-G is also shared with those people who get unemployment benefits.

1099-R

This kind of form is used to report distributions from retirement accounts like annuities and pensions.

1099-B

This form is useful to report loss & profit from the sale of stocks and other securities through a brokerage account. Its key information includes stock sales, capital gains or losses, and sales of securities.

1099-INT

This form is applicable to those whose earnings exceed $10 of the interest in the tax year. Brokerage firms, banks, and other investment firms send forms 1099-INT.

Who Should File 1099?

Small business owners and other independent contractors need to file 1099 tax if their payment is $600 or above. However, sole proprietorships and any Limited Liability Company are never a part of this process.

However, a C or S corporation remains uncovered in this category. Business owners need to fill out 1099 Forms with specific conditions. Here is a detailed explanation of the process as per the 1099 Form type:

1099 NEC (Non-Employee Compensation)

• The business needs to file 1099 NEC (Non-Employee Compensation) when it pays $600 or more for the services taken by contractors and freelancers.
• A payment of $600 or more is given to the property manager or vendors who maintain rental properties.

1099 R

• 1099-R is applicable when any entity distributes pension or retirement income.

1099 MISC

• When the person or business pays $600 or above for the prize, award, or any legal settlements, they need to issue a 1099 MISC.
• 1099 MISC is applicable if the business is paying $600 or above for office space rent.

What is the Ideal Time to File a 1099 Form?

There are different days for sending and filling out the 1099 Form which are as follows:

• Business owners must send the 1099 Form to the contractors before 31st January of every year.
• The filing deadline for the 1099 tax is 15th April, which is the same for every tax.
• The filing of 1099 with the IRS is 31st March for the online process and the last day of February for the paperwork.

In case you miss any of the above dates, penalty charges will be applicable as per IRS guidelines. These charges are as follows:

• If you file within 30 days – A penalty of $50
• If you take more than 30 days to file (before 1st August) – Penalty of $100
• If you file on 1st August or after – $260

A minimum penalty of $570 per statement will be imposed on you if you intentionally fail to file the form.

You can also request for a time extension using IRS Form 8809. However, you will not be allowed to extend until 31st January.

How To File 1099 Taxes?

Filling out the 1099 tax is not a complicated process. Form 1099 includes two copies, Copy A and Copy B, each serving a different purpose. To create a 1099 Form, you have an offline and online process. Here, we first go through the offline mode.

You must report the payment details on Copy A & Copy B when you hire an independent. The IRS receives Copy A and the contractor will receive Copy B. This is how you issue a 1099 to the contractor.

Once you receive form 1099 (Copy B), as an independent contractor, you are required to report the income shown on Copy B on your federal income tax return.

Gathering the Information

Certain information is necessary to gather before filling out 1099 taxes. This information is details of the business and receipt of payment information. Some of the details are as follows:

• Name of the business and its address
• Identification number of the taxpayer (social security number).
• The total amount of the payment was made

You can ask contractors to fill out Form W-9 to collect information that includes a vendor’s name, address, and Employer Identification Number (EIN) or Social Security number (SSN).. Once you have filled out the form, you need to check the bookkeeping records and cross-check the total amount you gave to the contractor.

Submitting Copy A to the IRS

Professionals must submit Copy A of Form 1099-NEC to the IRS by January 31st either through electronic mode or by sending mail.

For the paperwork, you must have Form 1099 on physical paper forms and submit it to the IRS through the mail after filling in handwritten information. A person cannot use the IRS website to get the printed version of Copy A.

Submitting Copy B to the IRS

Professionals must send Copy B to all contractors before 31st January. A person can access the IRS website to download the print version of Copy B.

Submit Form 1096

You must complete and fill in the 1096 form before 31st January of every tax season if you are submitting a physical copy of form 1099-NEC (Copy A) to the IRS. The IRS needs it to track each physical 1099 form you file throughout the year.

Online Process of Filling 1099 Form

Professionals can fill out a 1099 form through an online approach (file electronically). Here we explain the process for Copy A and Copy B:

Copy A

The Filling a Return Electronically (FIRE) system is the main platform to perform e-filling of Copy A. However, you need a Transmitter Control Code (TCC) before using FIRE. You must complete the Information Return Application for a Transmitter Control Code (TCC) to obtain a TCC. After that create an account on FIRE, once you complete the code in the process.

Copy B

The online process of filing the 1099 form (Copy B) is sending Copy B to the contractor through email. However, before going ahead with this process, you will need their approval. For this, you need to send an email to accomplish the same.

There are some set of IRS rules according to which your consent email must include the following:

• Scope of their consent
• Instructions for withdrawing consent
• What kind of process will they follow to update their information with you?
• Mention the date on which the form will be unavailable
• Details of the software and hardware they will need to view the form and print the same.

Benefits of Filing 1099

Filling out the 1099 Form is very beneficial for contractors, freelancers, and the IRS. Here are key points for the same.

For IRS

The Internal Revenue Service can easily track payments made to independent contractors. This ensures that reports of every income are done appropriately along with taxation. Underreporting chances are also getting low.

For Businesses and Employers

Filling out 1099 Forms always ensures that businesses are compliant with IRS regulations. Also, it helps to maintain a clear financial record while showcasing every detail of the payment. The 1099 Form is also helpful in building business trust and professionalism.

For Freelancers and Individual Contractors

The 1099 Form is useful for individual contractors and freelancers by acting as official documentation of income. It also claims deductions for work-related expenses. Additionally, it also contributes to establishing financial credibility for credit and attracting investment opportunities.

Conclusion

Filling out 1099 Forms accurately and on time adds value to your business. It is an important element of your financial & tax management. It assists in ensuring compliance with tax laws and helps maintain accurate records. An incorrect form can lead to other issues so one must be aware of the correct details.

1099 Forms are available in many varieties but choosing the right form is necessary when you think about filing 1099 taxes. It is because every business has a different nature of work and purpose and there are many kinds of income. You can consult a professional tax expert to avail better guidance on the tax filing process.

Frequently Asked Questions