The Form 1099 rules can get complicated - staying compliant doesn’t have to be. For the 2020 tax year, the Internal Revenue Service (IRS) has made some changes that could impact the way you have to issue Form 1099s. Read below to learn about the new rules and how your business may be affected.
To keep it simple, we've focused on Forms 1099-NEC and 1099-MISC in this article. At the end, we have placed information and resources to learn more about the other types of Form 1099.
WHat is form 1099?
The Form 1099 is known as an information return; it acts as a record of the payment received by non-employees that need to be reported during tax time. There are different versions of Form 1099 to report different figures such as non-employee compensation, rental property income, income from interests and dividends, and many more. These forms notify the IRS about who received compensation throughout the year in case those individuals don't report that income themselves.
WHat changed for the 2020 tax year?
Until this year, all non-employee compensation was reported on a version of Form 1099 called MISC. Form 1099-MISC was used to report rents, royalties, and other sources of miscellaneous income including the non-employee compensation. Starting in 2020, non-employee compensation (such as payment of contractors) has been moved to its own form, Form 1099-NEC.
When do you issue a Form 1099-NEC?
Under these new rules, a Form 1099-NEC must be sent to any individual or business entity (except for LLC's taxed as a C-Corporation or S-Corporation) if you paid $600 or more for services in a given tax year to independent contractors or others who were not employees of your business.
A Form 1099-NEC only needs to be issued for direct payments made by cash, check, EFT, ACH, wire, etc. Any payment made indirectly, through a credit card, for example, does not need to be reported on a Form 1099.
You are not required to file a Form 1099-NEC if you are not engaged in a trade or business or if the sum of all payments you’ve made to an individual or unincorporated business is less than $600 for the tax year (except to attorneys or law firms).
Whether you are filing by paper or electronically, Form 1099-NEC must be furnished to each recipient and the IRS by January 31st.
View or print Form 1099-NEC here.
When do you issue a Form 1099-MISC?
Under these new rules, a Form 1099-MISC must be sent to any individual or business entity (except for LLC's taxed as a C-Corporation or S-Corporation) if you paid $600 or more for services in a given tax year under the following circumstances:
- Prizes or awards
- Rent (unless you are paying rent to a real estate agent or property manager on behalf of the property owner – if you are unsure, issue them a 1099 form)
- Royalties ($10 or more)
- Backup withholding or federal income tax withheld (any amount)
- Attorney (any amount)
If you are filing by paper, Form 1099-MISC must be furnished to the IRS by March 1st, 2021.
If you are filing electronically, Form 1099-MISC must be furnished to the IRS by March 31st, 2021.
View or print Form 1099-MISC here.
It is imperative to issue Form 1099s by the correct due date to avoid being charged a penalty fee. The penalties vary and typically range from $50 to $270 per form, depending primarily on how late they are submitted.
USING W9S AS A PAYMENT TOOL
Form W9 is used to request a taxpayer’s social security or taxpayer identification number (you need this information to issue them a Form 1099). As a best practice, we recommend that you collect a Form W9 from each person or company you send a payment to – this will make the Form 1099 process simple and efficient at year-end.
DIFFERENT TYPES OF Form 1099
A different type of Form 1099 must be filed if you made payments under the following circumstances:
- Interest on a business debt to someone (Form 1099-INT)
- Dividends or other distributions to a company shareholder (Form 1099-DIV)
- Distribution from a retirement or profit plan or from an IRA or insurance contract (Form 1099-R)
In some cases, you may have to issue the same person multiple different types of Form 1099.
Example: If you paid an individual shareholder interest for a loan, it would be reported on Form 1099-INT. If you also paid them dividends on their investment in the corporation it would be reported on Form 1099-DIV.
Do you need help?
This information on this page is to be used as general guidelines for filing 1099s. It is always our goal to bring you as much information as possible in a digestible, easy-to-understand way. With that being said, there are many nuances to the Internal Revenue Code and for every rule, there is an exception.
If you have any specific questions regarding Form 1099 or if you would like to discuss your tax strategy options to maintain compliance, reach out to your favorite team member at The Heroes Group or click the button below.