Reporting income to the Internal Revenue Service (IRS) requires a lot of paperwork. If you’re an organization with contractors or employees who earn non-employment income, you may need to provide a Form 1099 to some of your workers and file these documents with the IRS. There are different 1099 forms for different needs, so read on to find out what this paperwork is and when you might need it.
What Is Form 1099?
Form 1099 is used to report money earned outside of salaries, tips, or wages. It is used to detail money for which taxes are not withheld, including freelance income, prizes and awards, rental income, and more. Companies send these forms to their workers (including freelancers) and to the IRS. Usually, 1099s need to be issued when a payee earns at least $600 in non-salary income. For some types of 1099, the threshold is $10.
1099s include the employer identification number (EIN) of the company issuing the form, the payee’s taxpayer-identification number or Social Security number, and the amount earned. This lets the IRS compare W-2 and 1099 forms against tax returns. W-2 forms are used to detail salaries and wages, including taxes withheld, while 1099 forms are used to detail income not covered by W-2 forms. If the information doesn’t match, the IRS may launch an audit or ask for more money from the taxpayer.
Contractors and others who need to report 1099 earnings do not file 1099s with their tax returns. Companies paying out money covered by the 1099 are the ones filing the forms. Contractors and other 1099 taxpayers still need copies of these returns so they can report the appropriate amount of income when they file their taxes.
When Do You Need Form 1099?
If you have workers who make money outside of what is covered by a W-2 form, you must file 1099 forms with the IRS and issue your workers copies of these. For example, if your business hires independent contractors or freelancers who earned at least $600 from you in the past year, you will send 1099s to these individuals to help them report their income. If you have investors or employees who earned dividends from company stock, you may need to issue a Form 1099 to them so that they can report the dividends they have earned to the IRS. You only need to send 1099s to those individuals who have earned income from you that is not reported on a W-2.
Filing 1099s properly can help you avoid an audit because it shows the IRS you’re meeting your tax obligations. It also helps your freelancers and contractors file their taxes correctly.
Keep in mind some workers may be covered by both a W-2 and a 1099. For example, let’s say you have a full-time administrative assistant at your marketing firm. This employee runs a graphic design freelance business in their spare time. If you hire them for work on a new website as a freelancer, you will need to file a W-2 for their full-time work and a 1099 for the freelance work he does for you.
If you need to submit 1099s, you can order them from the IRS. You can also generally find them in your accounting and tax filing software. You must mail them to your employees, investors, or other payees by January 31 so they can include the correct information in their own tax filings. Some 1099s are due to your payees by February 15, instead. If you have employees or non-employees earning income covered by 1099s, you must file the appropriate 1099 forms with the IRS by January 31 or February 28 most years (if you’re filing by mail), or on January 31 or March 31 (if you’re e-filing). The exact date depends on the specific 1099 you’re filing.
What Should I Do If My Business Needs Form 1099?
Chances are, if you run a business, you will need to file Form 1099 at some point. In 2021, 13.9 million Americans were part of an employee stock ownership plan (ESOP) and over 36% of Americans had freelance work in 2021. Whether you are working with an attorney, an accountant, an occasional bookkeeper, or offering stock options to investors, you may need Form 1099.
You may want to work with a tax professional to make sure you’re filing the right paperwork. You also need to keep careful records. If you mail a 1099 form to a payee and the payee reports an error on the form, you need to verify the correct information and may need to refile the form with the IRS.
It’s useful to have all the right forms and instructions in one place. With Connecteam, for example, you can keep 1099s and all relevant forms securely and online, so your team can access the forms they need to fill out and send to your employees. You can even create checklists, so your team knows what forms to send at tax time and when they must be delivered by. Connecteam lets you create onboarding training and store the latest employee or freelancer handbooks online, where anyone with access to your platform can look them up. You can use these tools to help contractors understand their tax obligations and remind them when you’ll be sending the Form 1099 they need.
What Are the Different Types of Form 1099?
There are a variety of 1099 forms. For many organizations, the most common form used is Form 1099-NEC, which is used for freelancers and contractors. These workers are so common today that there is even a term, 1099 workers, to describe them. However, it’s useful to understand the different kinds of 1099s available.
- 1099-NEC is given to non-employees (such as freelancers and independent contractors) who earn at least $600 from your company
- 1099-DIV is used to report dividend income
- 1099-INT is used to report money earned through interest, if more than $10 is earned over the tax year
- 1099-C is used to report cancellation or forgiveness of debts by lenders and creditors
- 1099-G is sent to those who received money from the government, usually in the form of benefits or tax refunds
- 1099-A is used by lenders to report real estate foreclosure transactions
- 1099-CAP lets corporations report big changes at their company, such as changes in capital structure or company control
- 1099-H is filed by health insurance providers to report advance payments for eligible taxpayers
- 1099-K is sent to payees who receive money through payment cards or third-party payment networks such as PayPal or Venmo
- 1099-LTC is sent to taxpayers who have received long-term care (LTC) benefits
- 1099-R is used to report income from taxable pension, retirement plan, and some insurance payouts
- 1099-Q is used to report distributions from a 529 plan or a Coverdell ESA (education savings account)
- 1099-QA is for reporting distributions from ABLE (Achieving a Better Life Experience) accounts
- 1099-OID is used by taxpayers to report certificates of deposit (CDs) or bonds that were issued for less than their face value
- SSA-1099 is for reporting repayments and benefits pay from Social Security Benefits
- 1099-SA lets taxpayers report distributions from medical savings, health savings, and Medicare Advantage accounts
- 1099-PATR is used to report distributions from cooperatives (including farms)
- 1099-B is used to report money made through the selling of securities
- 1099-S is used to report money made from real estate transactions
- 1099–MISC is issued for non-employment income such as prizes, awards, rent, and legal settlements
Using Form 1099 at Your Organization
If you’re like many businesses today, you may be working with independent businesses and freelancers. If you are and you’re paying more than $600 to any one person, you need to send Form 1099 to both your contractor (or other individual covered by a Form 1099) and the IRS. The IRS can compare the 1099 you file with the information your payee files to make sure reporting is correct. Staying on top of these forms can help you meet your tax obligations and may reduce your risk of an audit.