1099 Filing Requirements

Form 1099-NEC

Companies use Form 1099-NEC to report payments to nonemployees for services rendered to a trade or business. Some examples include payments for professional services such as to accountants, engineers, and contractors, referral and commission fees paid, payments for repair services, expense reimbursements to nonemployees when not paid under an accountable plan (i.e., when the nonemployee does not need to provide substantiation such as receipts), and exchanges of services. 

As the name suggests, payments for services are only subject to these 1099 reporting requirements when made to nonemployees, such as independent contractors. An independent contractor can be a sole proprietor or a larger business with their own employees. In our article regarding employees vs. independent contractors, we explain the difference between these two in greater detail.

The deadline for filing 1099-NECs is January 31st of the following tax year. You must file one copy of each form with the IRS. Additionally, you must provide another copy to the income recipient. Depending on the state, you may also need to file a copy with the state taxing authority. Fortunately, many states now participate in the Combined Federal/State Filing Program (“CS/FS”), which means forms filed electronically via approved systems with the IRS will automatically be forwarded to the state, eliminating a separate reporting requirement.

Although a taxpayer can request an extension of time to file form 1099-NEC with the IRS, no extension is available for providing these forms to recipients. Therefore, businesses must prepare these forms by the January 31st deadline to avoid all penalties.

1099-MISC

Form 1099-MISC reports rent payments, royalties, attorney payments, medical payments, and other specific types of income paid by a trade or business. Since the tax year 2020, many businesses tend to have more forms 1099-NEC to issue and fewer forms 1099 MISC. 

Payments to attorneys reported on form 1099-MISC include settlement agreements and other payments made in connection with legal services but excludes payments for the attorney’s services. You report these services in box 1 of form 1099-NEC.

The deadline for filing 1099-MISC forms and issuing copies to recipients is also January 31st following the relevant tax year.

Filing Requirements and Exceptions

Forms 1099-NEC and 1099-MISC generally do not need to be provided if the recipient received less than $600 in total payments during the tax year or less than $10 in the case of royalties. Payments are aggregated, so two payments made to one vendor where each is less than $600, but the total is $600 or more would need to be reported on form 1099. 

Companies do not need to report payments made with a credit card or via a third-party payment provider (e.g., Paypal or CashApp) on form 1099-MISC or 1099-NEC. Instead, the payment settlement entity reports these payments on Form 1099-K. Paying a lot of your vendor with a credit card can greatly reduce the number of 1099s you need to issue.

Forms 1099-NEC and 1099-MISC are also not required if the recipient is a corporation or a taxpayer that files as an S corporation, regardless of the amount paid. This exception can also significantly reduce the number of filings required by businesses. However, there are two main exceptions to the “corporation exception.” A company must still issue a 1099 for 1) payments for legal services and 2) medical and health care payments, even if the recipient files taxes as a C or S corporation. So, if you paid an incorporated law firm $1000 for legal services, you must still file and provide them with a 1099-NEC.

Information Required

To fill out form 1099-NEC or 1099-MISC, you will need vendors to send you form W-9, which provides the recipient’s name and/or business name, tax identification number, address, and other information. This will also help you determine whether the recipient files taxes as a C or S corporation and, therefore, may not require a 1099. Ideally, you would request W-9s before vendors begin providing services, but many businesses wait until January, when they realize 1099s need to be issued. This can create tight deadlines, especially when vendors provide information last minute or fail to provide information at all. 

The penalties for not filing these information returns can be quite costly, especially for businesses that pay many vendors for services. It ranges from $60 per late return filed within 30 days of the due date to $310 per information return filed after August 1st or not filed at all. 

There are many other situations and facts to consider to prepare accurate 1099s. For example, when payments to vendors include labor and materials, one must consider the payor’s accounting method and the breakout of the invoice. If the payor reimburses the vendor for a material expense under an accountable plan, they can exclude it from the 1099. On the other hand, if the vendor’s invoice lumps labor and materials into one fee, that total should be reported on Form 1099. If you are uncertain about how the details of your situation impact your reporting requirements, My CPA is here to provide our expertise and help you file accurate and timely 1099s. Contact us today!