The 411 on 1099s
A 1099 is an information form that is sent when certain payment requirements are met. A copy also goes to the IRS. If the person receiving the 1099 does not report it on his or her tax return, then the IRS computer will generate a notice and possibly a bill for increased tax plus penalties and interest.
W9
First step is getting your contractor or vendor to fill out a W9 form for you files. This can be downloaded from the IRS. Employees complete a W4 for their employers; Contractors complete a W9 for the businesses they work for. It is a simple information form that tells you the information you will need to prepare a 1099 - name, SS# or EIN#, whether the business is a sole prop or a corporation (corps don’t get 1099s). You will keep this form in your files. DO THIS before you pay anyone a dime. You are legally required to get this form from the people you contract to work for you. If they don’t want to fill it out, that means they don’t intend to report their income to the IRS.
1099-NEC
The 1099-NEC goes to freelancers, independent contractors, and others providing services to businesses. The business that pays for the services provides the 1099 when the total amount paid to that individual or LLC is $600 or more for the year. The 1099-NEC is fairly new. These payments used to be reported on the 1099-MISC.
As the recipient of the 1099-NEC:
You must report the income on your tax return. If you do not receive a 1099, you still must report the income, even if the payment was below the $600 threshold. Receiving income triggers your requirement to report income, not receiving a 1099.
If you do not receive a 1099 that you should have received, just report the income in your gross sales. If the business sent the 1099 to the IRS but your copy was lost, then you are still covered because you have reported the income.
As a business paying for services:
Your first responsibility is to have the independent contractor fill out a W9 form. This form gives you the contact information you need, as well as the individual’s social security number or business name and EIN, depending on how the service provider wants to receive the income. If the provider is a Sole Proprietor, Partnership, or LLC (whichever box they check on the W9), then you would provide a 1099. If the provider is a Corporation, then you do NOT provide them with a 1099.
You send a 1099 to any service provider (not retail/product sales) to whom you pay $600 or more during the year as long as the payments were made via check, cash, or Zelle. If you paid them via credit or debit card through a merchant account, such as square, or through a 3rd party such as Venmo or Paypal, then you DO NOT provide them a 1099. Those payments will be reported via 1099K by the 3rd party or merchant account. (See 1099K below.)
1099-MISC
File Form 1099-MISC for each person to whom you have paid during the year:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in:
o Rent (commercial rent only, not residential rental)
o Prizes and awards
o Other income payments
o Medical and health care payments
o Crop insurance proceed
o Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
o Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
o Payments to an attorney
o Any fishing boat proceeds
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
You may also receive a 1099-MISC if you are on the receiving end of any of these payments and will need to report the income appropriately.
1099-K
EDITED TO ADD: As of December 2023, The IRS has ONCE AGAIN deferred this requirement for ANOTHER year. You STILL might receive a 1099-K. Businesses do not HAVE to send them out for amounts below the threshold, but they CAN. Some of these businesses already had the automation ready to go before the deadline was extended, and they STILL might send 1099-Ks to people under the threshold.
This is the one you’ve been hearing about.
The 1099-K is fairly new. It’s been around for a few years, but you might not have run across it yet. You are likely to see it this year. The 1099-K will be provided by merchant accounts that service credit card/debit card transactions, such as Square and Stripe, as well as third party financial companies such as Venmo, Paypal, and Cash App. The 1099-K will report the income you received via these methods. This is why 1099-NEC should not be provided for transactions made via these methods, as it will create double reporting. You may be on the receiving end of a 1099-K; you will not need to send 1099-Ks to anyone.
Previously, there was a high threshold for the 1099-K. It was only sent to businesses that received $20,000 in payments over 200 or more transactions. A recent law change, however, as changed this threshold to just $600, making it highly likely that most businesses will receive one. The law was passed a few years ago and postponed. This year (2023) it is expected to be put into place, so plan for it.
Again if you are in business and receiving revenue, you should be reporting the income. Receiving a 1099-K should not impact your reporting in any way. Just make sure there is no duplicated income. For example, if a business sent you a 1099-NEC for payments that are also reported on a 1099-K. You will want to reconcile this on your tax return so the IRS doesn’t think you are underreporting by not claiming the double-reported income.
Personal transactions:
There is a possibility that you will receive a 1099-K for personal transactions or for those that you did not think constituted business income:
Your roommate uses Venmo to send you their share of the rent for you to pay the landlord. You are not the landlord, so it is not business income to you. Or your friends Paypal you the money to pay for their share of concert tickets that you purchased together with yours. You will be able to show this income on your tax return and also show that it is personal and not taxable income. Be sure to ask for help to ensure this is done correctly.
You purchase and resell household items or your album collection via an online marketplace. You may receive a 1099-K for the transactions. This is reportable and taxable income. You will either report it on a Schedule C as business income or on Schedule D as a capital gain. You will want to determine the amount that you paid to receive the items and deduct that. You will only be responsible for paying tax on the profit or gain on the transactions. To avoid this happening in the future, be sure to only use the personal, friends and family option on sales. To be honest and ethical, business transactions should be conducted using the business option of these apps. I see many businesses asking customers to pay them using friends and family. Expect a crackdown on choosing friends and family versus business in the future. If you are correctly reporting business income, then you will not need to worry.
EINs
An EIN is generally thought of as just for employers - after all, it is an Employer Identification Number - however, it is simply an ID # for your business that you may use INSTEAD of your social security number. If you are an LLC, you should have an EIN #. It is not required for sole proprietors, but you can still get one and use that instead of your social security number. If you are a business or a landlord filing 1099s, you will want to use an EIN instead of your social security number. You can apply for an EIN here (skip down to where it says “Apply Online Now”. The website will generate a letter with your number. This letter will NOT be mailed to you. You will never see it again, so download it and save it in at least two different places so that you can easily find it. It’s a challenge to get the number from the IRS if you lose it.
1099-NEC Revisited
If you have paid independent contractors or businesses $600 or more during 2023 for services provided to your business (or rental property), the deadline for filing 1099s is January 31. You will want to deduct these expenses on your tax return, so filing the 1099 helps you to document these expenses. Also, please note that when you prepare your tax return, there will be two questions on the return that you will need to answer upon penalty of perjury:
Were you required to file 1099 forms?
Did you file 1099 forms?
You will also file your 1099s with the IRS. If you are required to file 1099s for your payments made and you do not, you may be subject to penalties.
As a business providing business services to other businesses, YOU may be asked to complete a W9 for the people who are paying you, so that they may issue you a 1099 - do it.
NOTE: When you file 1099s, you are required to put your business contact information, as well as your tax ID number. For many sole proprietors, as well as landlords (you are in business, too!), that is your social security number. If you do not want to share your social security number (and you should NOT want to share that), then I encourage you to request an EIN (Employers ID Number) from the IRS. Request this directly from the IRS - https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online - Skip to the “apply” button on Step 3. You will immediately receive your number and EIN letter online. They will not mail it; this is the only way you will receive it. Download the letter, print it, and save the pdf in at least two different places. If you lose it, it can be difficult to get the information from the IRS.
If you need help filing 1099s for your business, I am happy to help. I prepare and file 1099-NECs for my business client at an affordable price. I need your information no later than January 15th.
The Fine Print
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in the entries in this blog (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
