IRS Form 1099 is a series of tax documents designed to record various payments made by individuals or businesses. These payments typically deviate from the conventional employer-employee relationship and encompass a range of income types, including freelance earnings, rental income, and investment gains. The entity responsible for the payment is tasked with completing Form 1099 accurately and subsequently sending it to the payment recipient.
When an entity makes a payment that requires reporting on Form 1099, it falls upon the payer to diligently fill out the pertinent sections of the form. Once finalized, the completed Form 1099 is sent to the individual or business that received the payment. The recipient then utilizes the information provided on Form 1099 to accurately report the income on their tax return.
Essentially, IRS Form 1099 plays a pivotal role in ensuring that diverse income sources, extending beyond regular employment income, are appropriately documented, and reported to the Internal Revenue Service (IRS). This helps maintain transparency in the tax reporting system, enabling the IRS to monitor and account for various taxable income streams.
Who Receives a 1099?
The IRS provides the following guidelines to help determine if you are required to file Form 1099 for independent contractors you have compensated throughout the year.
File Form 1099-MISC for each person to whom you have paid during the year:
- $10 or greater in royalties or broker payments in place of dividends or tax-exempt interest
- $600 or greater in:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Cash payments for fish or other aquatic life bought from anyone in the trade of catching fish
- Cash from a notional principal contract to an individual, partnership, or estate
- Payments to an attorney
- $5,000 or greater in direct sales of consumer products to a buyer for resale (anywhere that is not a permanent retail establishment)
Independent contractors or freelancers are highly likely to receive a 1099 Form reporting their earned income.
Types of 1099 Forms
There are two common types of 1099 Forms: 1099-NEC and 1099-MISC.
Form 1099-NEC is used for reporting non-employee compensation that is typically subject to self-employment tax. This form becomes necessary when payments are made to unincorporated entities, independent contractors, freelancers, or self-employed individuals. In 2023, if a business paid a non-employee $600 or more in the tax year, they would need to file Form 1099-NEC.
Form 1099-MISC is designated for miscellaneous information, necessary when receiving payments related to rent, awards, royalties, and other specified items. In the year 2023, it is required to file Form 1099-MISC when the total reportable payments reach $600 or more for any miscellaneous compensation, encompassing rent, prizes, and awards.
Taxpayers who receive over $20,000 and have over 200 transactions through payment apps
Note: The IRS has delayed the new $600 Form 1099 reporting threshold requirement for third-party payment organizations for tax year 2023 and is planning a threshold of $5,000 for 2024 to phase in the new law.
How to File Form 1099
As the payer, it is essential to fill out separate 1099 forms for each contractor. Once completed, send Copy A to the IRS, Copy B to the independent contractor or the person you paid, and retain Copy C for your records.
New for filings due January 31st, 2024: Copy A to the IRS must be filed electronically if the entity is filing 10 or more 1099 forms.
Timeliness is crucial; ensure that you send out the 1099 forms before the January 31st deadline of each tax year. Failing to meet this deadline will result in penalties that increase with time.
If you require assistance with filing Form 1099 or determining the necessary forms for your situation, our bookkeepers are prepared to help. Feel free to call us to arrange a complimentary consultation.