With the 1099 reporting deadline approaching, we gift a few top tips for business owners

‘Tis the season for spreading cheer, gathering with families, and—for all of you business owners—gearing up for the 1099 season.

Understanding 1099 Forms: 1099-NEC and 1099-Miscellaneous

But what exactly does that mean? First, it’s helpful to know what a 1099 is. Quite simply, the 1099 form is an information return (no payment is required) that businesses must use to report payments to non-employees to the IRS. If they aren’t filed timely, the IRS can issue penalties of $50 – $280 per return for tax year 2022, and worse, the IRS may disallow the business deduction for the amount paid. While there are multiple types of 1099 forms, the two we are focused on in this blog are called 1099-NEC (Non-Employee Compensation) and 1099-Miscellaneous.

Decoding the 1099-NEC Form

The 1099-NEC is used for reporting non-employee compensation, or for instance, income earned as an independent contractor, freelancer, or self-employed person. Folks in this group include individuals such as freelance writers, construction contractors, editors, bookkeepers, food delivery workers, and other gig workers. If you hired them as an independent contractor, you’ll file a 1099-NEC for them.

Exploring the 1099-Miscellaneous Form

The 1099-Misc is to report payments for everything else such as rent, prizes, and awards. Visit the IRS page here for some additional information about reporting payments to independent contractors.

Top Tips for Successful 1099 Filing

Sounds simple, right? Well, not so fast. For business owners, 1099s are among the most confusing IRS forms to deal with properly. To make your holidays a little less stressful, we are sharing some of our top tips for business owners who need to send 1099s.

OK . . . Little Drummer Boy, give us a drum roll:

Know who should receive a 1099 – The biggest misconception about 1099s is that they are only issued to independent contractors. (Tip: Read our August blog to learn more about employee classification.) However, the filing requirements are fairly broad. In general, any person or unincorporated vendor who is paid $600 or more for services needs a 1099. This includes your lawyer, accountant, landlord, and even the company that cleans your office. Paying a lawyer for his/her services is really no different than paying a contractor, yet this is one of the most misunderstood areas of 1099s. Many businesses neglect to send these forms to their lawyer or CPA, but you could end up on the IRS’ naughty list if you don’t.

Understand the due dates –All 1099 forms must be sent to the recipient by Jan 31. The due date to send copies to the IRS is also Jan 31 for 1099-NEC. For some reason, the IRS gives you more time to send copies of 1099-MISC to them. Paper returns (which we don’t recommend) are due Feb 28 and eFile returns are due March 31. See the handy chart included on this TurboTax page for more details.

Know the exceptions to the rule – The IRS is not a Grinch when it comes to exceptions, and there is a long list. The general rule of thumb is that you typically do not need to send 1099s to vendors operating as a S-Corporation or C-Corporation, and sellers of merchandise, freight, or storage. There are always exceptions. For example, if a law firm is a corporation and you pay for legal work, a 1099 is required. In general, when in doubt about whether or not the vendor payment should be reported, err on the side of caution and issue a 1099.

Benefits of paying via credit card and PayPal – More good news, the IRS allows taxpayers to exclude from Form 1099-NEC any payments you made by credit card or other payment platforms like PayPal.  Instead, credit card companies and PayPal will send 1099s to individuals.

No go on Venmo – Business owners who pay via Venmo must issue a 1099 to recipients. Venmo will not manage that for you, so be forewarned.

Track the state of states – Many states have filing requirements for the 1099-NEC, and it’s important to understand this if you happen to be doing business in a state where this is required. Check with your state Department of Revenue for more information.

Know the ins and outs of foreign workers – Take heed: Businesses must issue 1099s to non-U.S. citizens they hire to conduct work inside the United States. On the other hand, businesses do not need to issue 1099s to non-U.S. citizens who conduct all of their work outside the U.S. Bottom line: It’s important for businesses to verify citizenship status so they can take the right steps.

Pro tips for businesses (givers):

Collect W9s early – Business owners should collect W-9s from all new vendors — the IRS tax forms used to confirm a person’s name, address, and taxpayer identification number (TIN). Ideally it’s better to collect the form before you pay them. It’s much easier to get a W9 when payment is conditional on receiving the form, rather than trying to chase them down in January.

Use software – At Juna, we use Track1099 to manage and file the 1099s for our clients. It automates the process and integrates with accounting software including NetSuite, QuickBooks and Xero. 

Hire an expert – At Juna, we take care of the entire process of issuing 1099s from start (collecting W-9s from vendors) to finish (timely filing of the returns) for our clients. If 1099s are confusing to you, we can help.

1099s are a gift that keep on giving (and receiving):

While this blog focuses on business owners, we cannot forget contractors who receive the 1099s. After all, this is a two-way street: The business acts as the giver, while the contractor is the receiver. (Don’t ask us if it’s better to give or receive.)

Pro tips for contractors (receivers):

Review your 1099s — Let’s say you get a 1099 that states you earned $10,000, but you actually earned $1,000. You need to alert the business and have them issue a corrected 1099.

Update your W-9 — Be sure to update your W-9 form every year, even if your information doesn’t change. It’s a good best practice and signals to the business that you’re professional and diligent.

How Juna Can Help with 1099 Filing

At Juna, we handle the entire process of issuing 1099s for our clients, from collecting W-9s from vendors to timely filing of the returns. If 1099 forms are confusing to you, we can help. With a bit more understanding of 1099s, we hope to bring a bit more joy to your holiday season. After all, simplifying complex business practices is the best gift of all.