To make the process as quick and painless as possible, follow these tips:
- Keep your bookkeeping in order throughout the year to have accurate records in January, when the form must be filed.
- Request an updated Form W-9 every year from your contractors; this will help ensure you are issuing 1099 to your current address. Before issuing a payment to a contractor, make sure you have an updated W-9 on file.
- Make sure you have accurate information ready to go when filling out 1099s.
Understanding the W-9 Form
A W-9 form is a tax form required by the IRS entitled "Request for Taxpayer Information and Certification." This W-9 form is extremely basic and asks for fundamental information such as an independent contractor's identifying tax information, either a social security number or an Employer Identification Number (EIN). It is important to note that if an independent contractor has an EIN, they are not required to put their social security number on the W-9 form. The W-9 form requires the worker to attest with a signed declaration that all the information is accurate and that they have the legal authority to work in the United States. If any worker does more than $600 of work within a year for a company, they need to legally fill out this form for the company. If an independent contractor fails or refuses to fill out a W-9 form, the company may be required to withhold 28% of their earnings for taxes.
Where to Find a W-9 Form
- You can download a free W-9 form from the IRS website in either English or Spanish.
- Go to the IRS website at www.IRS.gov and search for "W9". You can download a blank copy of the W9 form and very specific instructions on accurately completing this important tax document.
- The W-9 should have the full legal name entered, no nicknames or abbreviated names. The 1099s should be issued the same way the name is listed on the W-9.
- Best practice should have you request an updated Form W-9 every year from your contractors; this will help ensure you are issuing 1099 to the current address. Before issuing a payment to a contractor, make sure you have an updated W-9 on file.
The Basics of Form 1099-NEC vs. 1099-MISC
Here are some key considerations when it comes to filing 1099s
Which 1099 form do you need and who do you issue it to?
Form 1099-NEC reports any non-employee compensation payments over $600; the most common payments reported on Form 1099-NEC box 1 will be payments for services performed by someone who is not your employee (typically referred to as an independent contractor) and payments to an attorney. Do not issue 1099-NEC on payments for physical products or goods, only for services. Non-employee compensation can include fees, commissions, prizes, and awards.
All other traditional Form 1099-MISC payments, such as rent, other income, royalties, and medical and healthcare payments, will be reported on Form 1099-MISC.
You do not need to issue 1099-NEC or 1099-MISC to C-Corporations or S-Corporations unless it is for medical or healthcare payments or attorney services. LLCs, which are sole proprietorships, are issued 1099s. The W-9 shows how the business is classified.
How should payments to attorneys be reported?
Attorney payments of $600 or more will be reported on either Form 1099-MISC or Form 1099-NEC according to the following rules:
- Attorney fees paid in the course of your trade or business for services an attorney renders to you are reported in box 1 of Form 1099-NEC.
- Gross proceeds paid to an attorney in connection with legal services (but not for the attorney's services) are reported in box 10 of Form 1099-MISC.
- The IRS outlines the following example: An insurance company pays a claimant's attorney $100,000 to settle a claim. The insurance company reports the payment as gross proceeds of $100,000 in box 10 of Form 1099-MISC. The insurance company does not have a separate Form 1099-NEC reporting requirement for the claimant's attorney's fees paid from these funds.
When are Form 1099-NEC and Form 1099-MISC due?
Form 1099-NEC and Form 1099-MISC are due to the IRS on different dates. Form 1099-NEC is due by January 31, 2024, while Form 1099-MISC is due by February 28, 2024. However, you must send both forms to recipients by January 31, 2024.
Other Types of 1099 Forms
Other types of 1099 Forms are specific for certain types of wages, including the following:
- 1099 DIV — Reporting of any dividend income or monetary distributions
- 1099-C — Reporting of $600 or more in cancellation of debt
- 1099-K — Reporting of any merchant cards or third-party network payments
- 1099-INT — Reporting of amounts greater than $10 in interest income
- 1099-S — Reporting of proceeds from certain real estate transactions
The IRS has included Form 1099-NEC in the IRS 1099 Combined Federal/State Filing Program (CF/SF). Under this program, the IRS sends Form 1099 information to participating states, meaning companies do not have to file separately with those states. If a state does not participate in the combined filing program and requires 1099 filings, you must submit a separate state filing in the format required by that jurisdiction. It is essential to understand the reporting requirements for the state(s) where the form issuer does business, where the payee resides, and where the services were performed. Filers also need to understand the state's filing deadlines and e-file requirements.
Common Mistakes When Issuing 1099 Forms
Many difficulties and challenges can occur when issuing different IRS forms, as the rules can often be complex. The following are some of the common mistakes that happen when issuing 1099 Forms.
- Not including the full legal name of the contractor on the 1099 Form
- Entering an incorrect number (avoiding transposing numbers) for the TIN/EIN
- Issuing a 1099 Form to employees when they should instead receive a W-2 Form at year-end for their wages
- Failing to issue the 1099 Form by the January 31 deadline
What are the penalties for a business failing to meet a 1099-MISC or 1099-NEC deadline?
If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $60 to $310 per form for 2023, depending on how long past the deadline the business issues the form. There are maximum fines per year for small businesses. If a business intentionally disregards the requirement to provide a correct payee statement, it's subject to a minimum penalty of $630 per form for 2023 or 10% of the income reported on the form, with no maximum.