1099 Income Tax Requirements

Many companies are aware of the requirement to issue Forms 1099-NEC to subcontractors but may not be aware of the other types of payments that are reported on Form 1099 series. Below are some items to keep in mind when filing.

What is a 1099?

Forms 1099 are used to report different types of income an individual may receive throughout a given year that is not a salary from an employer. In addition to the 1099-NEC (non-employee compensation), common forms include 1099-INT (interest), 1099-DIV (dividends), 1099-C (cancellation of debt), 1099-MISC (see below) and a variety of other forms that are less common but required as necessary.

This link includes a list of all forms and related filing requirements: https://www.irs.gov/instructio...

What type of payments should I report?

Companies should report payments for services to any individual, partnership, limited liability company or attorney on Form 1099-NEC. This only applies to payments made in the course of trade or business. Individuals are not required to report these types of payments. Companies may need to report accounting and legal fees, cleaning or landscaping services, consulting fees, and similar payments in addition to contract labor.

Payments for rent, royalties, prizes, payments to attorney other than services, and more are reported on Form 1099-MISC.

Interest, dividends, cancellation of debt, and certain other payments should be reported on their specified forms.

The lists above are not comprehensive, so if your company has made a payment for something other than products and materials to any of the entity types listed above, it’s always a good idea to look into whether you should report that payment on Form 1099. The IRS link above has additional details.

It is not necessary to report payments such as utilities or health insurance.

What is the threshold?

Only total payments of $600 or more for the year are required to be reported, although any payment is still taxable for the recipient. However, there are different thresholds for royalties, interest and dividends, direct sales made to non-retail establishments, and fishing boat proceeds, so make sure you check the instructions if your company has made those types of payments.

Only include payments that have been made during the calendar year. If a vendor invoices your company for work performed in 2022, but you do not pay them until 2023, the payment should be reported in 2023.

What about credit card payments?

Any payment type subject to reporting on Form 1099-K such as credit card, PayPal, Venmo and other payment apps does not need to be reported on Form 1099-NEC or MISC. Doing so will duplicate the income reported to the IRS for the recipient.

How do I prepare the form?

In order to prepare the forms, you will need the recipient’s full name, address, and their social security number or taxpayer identification number. It’s a good practice to request that the vendor furnish that information on Form W-9 prior to remitting any payments to a new vendor. Having this information on file will make the preparation of the forms much easier in January, and you won’t have to spend time tracking down missing information. You can download a copy of Form W-9 from the IRS website.

Make sure your system reflects the name and tax ID properly. If the vendor is John Smith and his company is Acme, LLC but he lists his social security number on the Form W-9, be sure to issue the form to John Smith, not Acme so the IRS can correctly match up the income he reports.

Most in-house software packages can produce the forms, and there are also third party and online options. Of course, HHM is always available to assist with the process.

When do I need to file?

Forms 1099-NEC are due to the recipients by January 31 of each year, and the government copies should be mailed to the IRS or e-filed by that date as well. With a few minor exceptions, the other forms in the 1099 series are due to recipients by January 31 and the IRS by February 28 (paper) or March 31 (electronic).

If you file 250 or more information returns during the year, you must file electronically. The threshold applies separately to each type of form.

What if I don’t file?

The IRS imposes penalties for failure to file information returns with the IRS on a timely basis (as well as the failure to furnish returns to payees on a timely basis). In addition, the IRS may also assess penalties if a filer fails to include all the information required to be shown on a return (e.g., taxpayer's TIN) or reports incorrect information (e.g., incorrect dollar amount). Please note, the penalties have increased for the current tax year. Below are the penalties broken down:

• If you correctly file within 30 days of deadline: $50 per form ($588,500 max)

• If you correctly after 30 days and by August 1: $110 per form ($1,766,000 max)

• If you correctly file after August 1: $290 per form ($3,532,500 max)

• The IRS reduces max fines for each tier to $206,000, $588,500 and $1,117,500, respectively for filers that are small businesses with less than $5 million in gross receipts for the past three years.

Contact a tax professional if you have questions or need assistance in filing.