What is a 1099 form and do I need to file one?
Often times when we ask clients if they need help filing Form 1099 for their company or organization, their only response is a blank stare.
It’s then followed up with “What is a 1099 form and do I need to file one??”
We’re definitely not surprised by this response. With more than a dozen different 1099 forms and each one having a long list of rules and exceptions to those rules, it’s hard to keep up! Plus, it’s hard enough keeping these straight from all of the other form numbers the IRS issues.
In this article, we’re going to take a look at two of the most common forms we help file for small businesses and non-profits:
1099-NEC and 1099-MISC
In the most general of terms, 1099 Forms are “information returns” that state income that the recipient has received by the sender, which was not employee compensation (that’s reported on a Form W-2). In most cases, the “Sender” (the small business or non-profit who paid the money) is the one who creates and sends the 1099 to the “Recipient” (the person or business who received the money).
The 1099-NEC (Non-Employee Compensation) reports payments for services of non-employees by your business or non-profit. This could be anything from a subcontractor, bookkeeper, lawyer or web designer, to a repair or maintenance company, or cleaning services. Anyone who provides “services” to your business that isn’t an employee could qualify to send a 1099.
The 1099-MISC (Miscellaneous) reports payments for a number of different reasons. The main reasons we see are payments for rented spaces or equipment, and prizes or rewards. There are many other reasons, but for the sake of clarity on the topic, we’ll leave those for another article.
At the end of each year, you will want to run through your financials and ask the following questions:
Did I pay any individual or business for services that totaled $600 or more?
Did I pay any attorney for legal services that totaled $600 or more?
Did I rent any spaces or equipment that totaled $600 or more?
Once you have that list together, you’ll next need to check to see if who you paid qualifies for a 1099 or whether they qualify for an exemption – Of course, there are exemptions to the rules!
Exemption #1 – Incorporation Tax Status
Companies that are incorporated for tax purposes are exempt from receiving a 1099, unless it’s an attorney or law firm. Attorneys and law firms always receive a 1099. (Yep, it’s an exemption to the exemption!)
If you paid money to a business and they have “LLC” in their name, they still may need a 1099. A limited liability company for legal purposes often times is not incorporated for tax purposes.
How do you know whether who you paid is “incorporated”?
You need to send them a Form W-9, which requests their business entity tax status and other information you would need in order to complete the 1099.
You’ll need to have this form on file for everyone you pay for services, so it’s a good idea to send this before you issue your first payment to them. (Check out our 1099 Training Course for detailed information on why you need this form before you pay and when you need to withhold taxes from your payments.)
Exemption #2 – Paying with Credit or Debit Cards, or a Third-Party Payment Processor (PayPal, Venmo, Cash App, etc.)
When you run through your list, you’ll want to make a note of any payment that you made with a credit card, a debit card, or through payment processors like PayPal, Venmo, and Cash App using Goods & Services (not Friends & Family, see below). When you used a debit card, this would have gone through your checking account, but you would have used your card number, not your routing and bank account numbers (that’s considered “ACH”).
For these payments, it is actually the responsibility of the payment processor (Square, Stripe, Shopify, QuickBooks Payments, PayPal, Venmo, Cash App, etc.) to issue a 1099-K to the recipient. There are separate rules for that form. As of January 1, 2022, based on the American Rescue Plan Act of 2021, the 1099-K threshold is now $600. It was previously more than $20,000 and 200 transactions.
You can exclude those payments from your calculation. If you paid multiple ways, you will need to add up the amount paid directly from your bank account (using either cash, check, ACH, etc.) to see if it meets the dollar amount threshold.
If you used Zelle to make the payments, paid with PayPal using “Friends & Family”, or if the recipient doesn’t have a “business account” with Venmo or Cash App, then those don’t fall under the exemption since they’re considered peer-to-peer money transfers (and could be illegal, violating terms of service). These would need to be included on the 1099 you prepare. (Check out this article for the best practices on using these in your business.)
Exemption #3 – Property Management Companies
This exemption is only for rents paid for spaces. If the business you pay rent to is only a property manager and not the owner of the building, then you don’t need to issue a 1099 to them. You only need to issue a 1099 to the building owner. Of course, that means you’ll have to ask directly if who you pay owns the building because there’s no easy way to figure that piece out.
As you look through your financials for payments, keep this flow chart handy to easily run through and identify to whom you need to send a 1099.
So, you’ve got the basics down for who needs a 1099 and how much you paid them, now how do you actually get them filed?
Here are some options:
We offer 1099 e-filing services to small businesses and non-profits. Please contact us and we’ll get you on the list!
e-File them yourself using a provider like Yearli by Greatland. Click the link for 15% off your filing! *Affiliate link
e-File them through QuickBooks Online.
Order printable 1099 forms from an office supply store or free carbon-copy 1099 forms from the IRS, fill them in and mail them out. (If you need to file more than 250, you’re required to e-file.)
We hope that this was just enough information to get you over the hurdle to filing 1099 forms for your business or non-profit!
If you would like to go more in-depth, we have a 1099 Training Course available where we cover these items in more depth and also walk through:
the differences between employees and independent contractors
what happens when you don’t get a taxpayer ID from someone
what happens if you don’t file required 1099s
when you need to withhold taxes from payments
each of the boxes on the 1099-MISC, NEC and W-9
habits to set you up for success!
Click here to see the details for this digital course and how to purchase it.
No assurance is given that the information is comprehensive in its coverage or that it’s suitable in dealing with each individual’s particular situation. This blog article is to provide general information only and does not constitute tax or legal advice, and cannot be used or substituted for tax or legal advice. Savvy Bird Consulting, LLC is not responsible for the implementation or outcomes this material may have.