UPDATED: November 21, 2022, including information about Form 1099-NEC.
It’s November, which means the end of the year will be upon us in a flash. For business owners, the new year brings with it not only a fresh calendar and a new set of company goals – but also ushers in the season for sending out 1099s to vendors. The rules regarding 1099s can be confusing when it comes to who should receive a 1099, when to file 1099s and how to actually prepare and distribute 1099s. As a result, many small business owners choose to simply not file anything at all. Not filing 1099s can lead to costly penalties for businesses that don’t file in a timely manner. Here’s a look at what you should know about 1099s, and what you can do now to prepare for a smooth distribution in January.
What has changed about 1099s?
A new form, 1099-NEC Non-Employee Compensation, was introduced back in 2020 and there is still some confusion about the various forms.
- 1099-NEC: Businesses file a Form 1099-NEC for each person to whom they paid at least $600 during the year. This payment has to have been for services performed by a person or company who is not an employee. IRS instructions for Form 1099-NEC
- 1099-MISC: Businesses file Form 1099-MISC for payments over $600 that include things like rent, prizes, awards or “other income payments. IRS instructions for Form 1099-MISC
Additionally, there are a variety of other 1099 forms you may need to issue, including the 1099-INT, 1099-DIV, and 1099-R. If you aren’t sure what these are or want to make sure you are covered, check in with your CPA.
Who should receive 1099s?
If you’ve paid a non-employee more than $600 during the year, you are required to send that individual, LLC, LP, or estate a Form 1099. While this includes a wide variety of vendors and sub-contractors, the IRS also provides a lengthy list of exceptions.
One of the biggest obstacles to sending out 1099s is a lack of complete information for the vendor or sub-contractor receiving the form. If you have a Form W-9 on file, this will provide the information (mailing address, Tax ID, corporation status) you need to complete the 1099-NEC. One of our suggestions is to require a W-9 from every vendor before they receive their first payment from you. You will find this and many other best practices in our blog about Vendor Onboarding Best Practices.
The end of the year is a great time to start reviewing your list of vendors to make sure you have a W-9 on file for everyone who will need to receive a 1099. This will ensure a smoother distribution process when January rolls around.
When to file and distribute 1099s
Mark January 31 on your calendar. If January 31 falls on a weekend, the due date becomes the next business day. That’s the date by which businesses are required to issue all Form 1099s to vendors. It’s also the deadline for filing 1099s with the IRS, when reporting non-employee compensation payments. This deadline is for both paper and electronic filing. A summary of all 1099s issued is made to the IRS via Form 1096, and Copy A of each 1099 should be attached to the filing.
It’s also important to note that your state may also require businesses to file 1099s at the state level. Consult your state laws or contact your accountant to find out if this applies to your business.
What if we miss the 1099 distribution deadline?
Be prepared for penalties. If you fail to submit the appropriate information by January 31, the maximum penalties can vary depending on the number of returns and when the forms are finally filed with the IRS.
These penalties can add up quickly, ranging from $50 to $110 per form. Penalties could also be assessed if information is incomplete or incorrect on a 1099.
How do I prepare and distribute 1099s?
Unfortunately, you cannot go to the IRS website and simply download a form; the IRS pre-prints Form 1099 in triplicate. You can order forms or pick them up from the IRS. You can also find them at the post office or the library, wherever IRS forms can be found. Alternatively, financial software tools like QuickBooks and other online resources, like Tax 1099 and Yearli, allow you to create 1099s electronically.
After 1099s are prepared, Copy A is sent to the IRS; Copy B goes to the vendor; and Copy C should be retained for your files.
While utilizing vendors and subcontractors is vital to your business, keeping track of the necessary paperwork can be time-consuming and cumbersome. Our CPAs can assist you in identifying who should receive 1099s, preparing the forms with accurate and complete information, and distributing them in a timely manner to the appropriate parties. Starting now will avoid crunch time and costly expedite fees you may pay to meet IRS deadlines. For more information about our services, please take a look at our services page.