If you're a business owner who's done work for another business owner, you may have received a 1099 at some point. But do you know when you should be issuing a 1099 yourself? This is one area many business owners aren't compliant in simply because they aren't aware of what a 1099 is. If you're a business owner, it's good to get in the habit of having all Independent Contractors/Freelancers fill out a W-9 before starting any work. You'll need the information from the W-9 to issue the 1099. Here's a link to the W-9 , print out a bunch so you have them ready to go and keep the completed ones in a file so you're ready when it's time to issue the 1099s.
What is a 1099?
A 1099 form is a record of income paid by a person or a business. The payer fills out the 1099 form and sends copies to you and the IRS. A 1099-NEC are sent directly by the client you worked for and if the contractor falls into the first set of bullet points below. A 1099-K is issued from the credit card, Stripe or PayPal (but PayPal does have exceptions, see below) There are several other kinds of 1099 forms which you can read more about here.
The IRS uses 1099s to figure out how much income you received during the year and what kind of income it was. It shows the money that you were paid as an independent contractor or freelancer.
Who gets a 1099?
Any Independent Contractor or Freelancer that checks off the following:
• Was paid $600+
• They were paid cash, check, Bank ACH, Zelle, Venmo or CashApp
• Is not an S-Corp or a C-Corp
• Performed a service. This includes but isn't limited to...Plumbers, Electricians, Interior Designer, Movers, Painters, Landscapers, Marketing, Cleaners, etc. Also landlords which is one lots of business owners aren't aware of.
You don't issue a 1099 if you can check off any of the following:
• The Independent Contractor/Freelancer made less than $600
• They were paid by credit/debit card, Stripe or PayPal (PayPal must be flagged as a business payment or using an account specifically for work). These methods issue the 1099-K directly from them.
• Is an S-Corp or a C-Corp
What happens if a business owner doesn't issue 1099s?
If a business fails to issue a form by the 1099 deadline of 1/31, the penalty varies from $50 to $280 per form in 2022, depending on how long past the deadline the business issues the form. There are maximum fines per year for small businesses. If you're a business owner tracking your expenses, figure out which Independent Contractors you need to issue a 1099 to based on the list above. This can be easily done if you used a bookkeeping software, otherwise you may have to go back through your bank statements to find checks or ACH transfers. Venmo, CashApp don't have great records of payments so avoid using those to pay contractors for this reason. PayPal will only issue the 1099-K if payments were made with a business account or the payment was marked as business.
As a business owner, make sure you have the W-9s from all of the Independent Contractors who did work for you. If you didn't collect one when they started work, email them a W-9 now (yes, now-don't wait!) and ask that they fill it out and get it back to you ASAP. If they don't respond to your request, at least you can show the IRS that you made the effort to contact them for their information but this is why it's a good practice to collect the W-9 before they start any work.
What happens if an Independent Contractor doesn't receive a 1099?
The responsibility is on the client to pro-actively issue the 1099. If you didn't receive a 1099, you're still required to report your income. Keep in mind that if you received a 1099 but don't turn it in to your CPA when it comes time to file, you could be the one facing penalties as the client did their part and issued the 1099 which the IRS received a copy of making them aware of your income.
Hopefully this clears up any confusion on 1099s and why they're so important! If you're a business owner looking to issue 1099s, I suggest a website like Track1099. Many bookkeepers, including myself, offer 1099 services for a fee. Keep in mind that the longer you wait to issue 1099 as the 1/31 due date approaches, the more likely you are to pay a higher fee per 1099. If you're looking to outsource getting this done, make sure you have the W-9s from all of the Independent Contractors because they have all of the information needed for the 1099.