What are 1099s and Why are They Important?

Tax forms can be complicated, and as a business owner, you’re responsible for filing quite a few throughout the year. But if you work with independent contractors, there’s yet another form that you need to be familiar with: 1099. 

You need to understand what 1099s are, who needs them, the different types and why they’re important.

What are 1099s?

A 1099 form is used to report non-employment income to the IRS for tax purposes. For example, if you paid a freelancer $600 or more in non-employment income, you would need to file a 1099-NEC (nonemployee compensation) and provide a copy to the freelancer as well.

1099s can play an important role in business tax planning if you work with independent contractors, as they allow you to deduct 100% of their costs.

Who Needs a 1099?

  • If you received dividends from a stock or were paid $600 or more as an independent contractor, you will need a 1099 to report your income. 
  • If you run a business and hire a contractor for $600+ during the year, you will also need a 1099.

What Information Do They Collect?

A 1099 is an information filing form that reports non-salary income. The information it collects will depend on the type of form. 

For example, a 1099-NEC will contain the following information:

  • Payer’s name and location
  • Payer’s Taxpayer Identification Number (TIN)
  • Recipient’s name and location
  • Recipient’s TIN
  • The amount of nonemployee compensation paid
  • Tax withheld information

Other types of 1099s may contain or collect other information.

Types of 1099s

You’ve likely heard of a 1099-NEC and a 1099-MISC, but there are a ton of these forms that you’ll need to know about and when to issue.

1099-A

Mortgage lenders send out a 1099-A if some or all of a mortgage was canceled or the home was sold during a short sale.

1099-C

Sent by lenders or credit card issues if a customer’s debt is settled for less than they owe.

1099-CAP

Required for anyone who holds corporate shares and got cash, property, or stock as a result of either an acquisition or major change in structure.

1099-DIV

Anyone who receives dividends, except from a credit union, will receive a 1099-DIV.

1099-G

You may get a 1099-G if you receive money from the government (state, local, or federal), such as a tax credit or refund. Taxpayers who were unemployed during the tax year may also receive one of these forms. 

1099-INT

If you run a bank, brokerage or investment firm, you may need to send out a 1099-INT. 1099-INTs are sent when a taxpayer (your client or customer) has $10+ in interest per year, which will need to be declared on their tax returns.

1099-K

Payment apps (such as PayPal), online marketplaces, and payment companies must all send out a 1099-K if someone receives more than a certain monetary threshold or number of payments.

The IRS  increased this threshold to $5,000 in 2024 as they phase in a new law.

Even if you don’t receive a 1099-K, you need to report your income to the IRS.

1099-MISC

Miscellaneous income falls under the 1099-MISC when the income isn’t derived from any income outlined in the many other 1099 forms. Prior to 2019, nonemployee compensation was reported on this 1099 but has since moved to the 1099-NEC.

1099-NEC

If you’re paid as a contractor from a business, you’ll receive one of these forms. As a business, you’ll need to issue one of these forms to contractors who earn $600 or more. You do not need to issue this form if you purchased products and not services from the contractor.

1099-OID

You may receive a 1099-OID if you purchased bonds, notes, or other financial instruments at a discount to the face value or redemption value at maturity. 

1099-Q

A 1099-Q reports money received by a 529 plan. When the funds in a 529 plan are used for qualified education expenses, they are not typically subject to tax, so this form is for record-keeping purposes.

1099-R

If you received a payout or distribution from a retirement plan, individual retirement account (IRA), or pension, you’ll receive a 1099-R. Some annuities and life insurance contracts may also issue a 1099-R.

1099-S

A 1099-S is issued for real estate transactions if you exchanged or closed a sale during the tax year. Real estate transactions can include proceeds or gains from the sale of residential property, land, or commercial or industrial buildings.

1099-SA

If you take distributions from your health savings account, Medicare Advantage, or Archer medical savings account, you will receive this form. HSA and Archer distributions aren’t taxable if you’re using them for qualified health expenses, so this form proves that the funds left the account with you.

Why are 1099s Important?

Sending out 1099s may seem tedious – especially to owners. You need to remain compliant, but these key forms go beyond just compliance. You can and should leverage 1099s because they help:

  • You legally deduct expenses. For example, if you pay vendors, you’ll be able to document these expenses using 1099 forms. Otherwise, you may be unable to deduct certain expenses.
  • Transaction proof. Do you know how much you’ve paid your accountant, freelancers, or vendors operating as sole proprietors? If not, your 1099 provides detailed records of these transactions for you if proof of the transaction is ever necessary.
  • 1099s allow you – and the other party – to catch potential payment errors. Mistakes happen, and if you have a 1099, you can catch these mistakes and rectify them before they become an issue.

You need to, as a business, file all of your 1099-NECs by January 31 and your 1099-MISC by March 1. 

From an IRS standpoint, the main goal is to ensure that businesses are paying contractors properly and that taxes are being paid. You can face penalties of $60 – $310, depending on how long you failed to file a 1099 form.

It’s easier to ignore 1099s, but if you do, you set yourself up for failure when trying to deduct expenses or find errors.

If you don’t want to worry about who needs you to send them a 1099 or if this person really needs a W-2, working with an accountant who can handle this for you will free up time and ensure that you’re following all legal requirements.

To learn more about how we can help you with 1099s, schedule an appointment

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