If you’re a small business owner, you’ve probably heard the term 1099. And you might fall into one of two camps – yeah, yeah, I know, I take care of those (or my bookkeeper/CPA/tax preparer does), or what the heck are they and do I need to file them???
If it’s the latter, today’s post is for you! We’re talking all about 1099s, what they are, how to file them, tips for making the process easier at year end, and how collecting W-9s throughout the year can save you a ton of time and headache.
What are 1099s?
In its simplest form, a 1099 is an IRS form that reports income earned from places other than employment (which is reported on your W-2, if you get one). 1099s are used by the IRS to ensure that all of the income you have earned is reported to them so that you can be taxed on it if necessary. A 1099 can be received for different reasons, depending on how and why the income is earned.
Wait, there’s different kinds?!
Yes, there are several different types of 1099s. As a small business owner, we’ll focus on the ones that will most likely apply to you. There are others that could apply depending on your situation, so make sure to discuss your specific situation with your tax preparer. Common 1099s for small businesses include:
- 1099-NEC – This is the most common 1099 that you’ll be dealing with as a small business owner. The 1099-NEC (Non Employee Compensation) debuted in 2020; prior to that year, form 1099-MISC was used for the same purpose. This is filed for any person you hired to perform services for you that wasn’t any employee (aka a contractor). That’s a pretty broad group, so let’s narrow it down and explain the exemptions.
- 1099-NECs do not need to be sent to corporations.
- There’s a threshold – if less than $600 was earned by the contractor in the calendar year, a 1099-NEC does not need to be sent.
- If you paid the contractor electronically with a credit card/debit card, Paypal, Stripe, or other online payment processor, you do not need to file the 1099. It is the obligation of that payment processor to file the 1099 for that contractor. This stipulation will exempt you from filing the 1099-NEC for most contractors, but keep in mind that if you are paying them by cash, check, Venmo, or Zelle, you will still need to file. (And side note: if you’re still using Venmo for your business, let’s chat)
- 1099-MISC
- Before 2020, contractor payments were reported on a 1099-MISC, but since the creation of the 1099-NEC, the MISC is reserved for Rents, rewards/prizes, other income payments, medical and health care payments, proceeds paid to an attorney, and other types of income that probably don’t apply to you (but again, check with your tax preparer, especially if you have income from fishing boat or crop insurance proceeds).
- You likely will not be issuing any 1099-MISCs, but you may receive them.
- 1099-K
- If you received $600 or more from third party payment processors (Stripe, Square, Venmo, Cash App, etc), you will receive a 1099-K from them. The $600 threshold is new this year – previously it was $20,000 AND 200 transactions. A special note about Venmo: This does not apply to payments to Friends and Family, only payments for Goods & Services. (But seriously please stop using Venmo for your business, there’s so many better options!)
The only 1099 you will likely need to worry about filing is the 1099-NEC for your contractors.
What do I need to file them?
To file 1099-NECs, you will need the following from the contractor: their legal name, dba if different from their legal name, Taxpayer ID Number (Social Security Number or EIN), tax classification, and legal address. The best way to gather this information is to have them fill out a W-9. We recommend collecting a W-9 from every vendor you work with before you submit payment to them. This will allow you to easily determine who needs to receive a 1099 at year end.
When is the deadline?
The deadline to file 1099-NECs for the previous tax year is January 31st.
How do I file them?
If you’re working with a CPA or bookkeeper (or both), we recommend having them help you file the forms. If you want to go the DIY route, we love Track1099.com for its simplicity and ease of use.
Have questions about 1099s? Schedule a call to learn how we can help you!
The content in this blog post is provided for general informational purposes only and should not be considered professional tax or legal advice. The author is not a Certified Public Accountant, and no assurances can be made regarding the outcomes or consequences of tax returns, IRS actions, or any financial decisions based on this information. Readers are strongly advised to consult with a qualified tax professional or legal advisor for personalized guidance specific to their individual circumstances. The author expressly disclaims any liability for decisions made based on the information presented in this blog post.
