What is IRS Form 1099? Definition, Tips, and Types

Wondering exactly what Form 1099 is and if you need to prepare one? The answer depends on the nature of your work. If your organization paid more than $600 to an independent contractor during the last calendar year, then yes, you’ll need to prepare Form 1099-NEC to document their earnings.

However, there are different subtypes of Form-1099 you should be aware of, as well as different strategies to ease the administrative burdens, such as partnering with an Employer of Record service to ensure legal compliance. 

Let’s dive in to get all your questions answered. 

Form 1099: Key Points

• Form 1099 is a type of information return that documents certain types of income an individual may have received that are not considered employment income. 
• Form 1099 is prepared by whoever issued the payment to the individual, whether that is a corporation, financial institution, government agency, insurance company, or another payer. 
• Once prepared, Form 1099 is submitted to the payee and IRS simultaneously. The deadline for submitting Form 1099 to recipients is January 31st each year. 
• Failure to submit form 1099s by the due date, or submission of incorrect information, may result in fines or penalties as determined by the IRS. 

What is Form 1099?

The term “Form 1099” describes a series of documents the Internal Revenue Service (IRS) refers to as “information returns.” Here are some key points to help you understand when and how to use this form, as incorrect filing or non-compliance can result in penalties:

• What is it used for? It’s used to report different types of income individuals may receive in addition to their salary. There are different types of 1099 forms, depending on the different types of income an individual may have received (more on this below).
• Who files Form 1099? The person or entity that pays you is responsible for filling out the appropriate 1099 tax form and sending it to you by January 31. They will also submit a copy directly to the IRS. If they neglect to send or file these mandatory forms, they could face significant penalties.
• Who should receive a Form 1099? Individuals who receive a Form 1099 for services rendered are considered to be self-employed and must report this income on their individual tax return. (In contrast, full-time employees are considered W-2 workers, and have income taxes automatically deducted from their wages.)

Different Types of Form 1099

There are over 20 sub-types of 1099 forms that report the different types of income individuals may receive throughout the year from different sources. However, many of these versions don’t relate to organizations that manage employees or hire independent contractors. Instead, they may be issued by a government agency, a bank, or an investment fund company. 

The most common versions of the form that US-based HR professionals should be aware of are form 1099-H, form 1099-MISC, and form 1099-NEC.

• Form 1099-DIV (dividends and distributions): Used to report dividends and distributions from investments to shareholders. While not commonly issued to employees or independent contractors, it may be relevant for HR professionals managing corporate benefits or investments. 
• Form 1099-H (Health Coverage Tax Credit (HCTC) Advance Payments): Reports payments of advance payments of the Health Coverage Tax Credit made to health plan administrators for eligible individuals. This form is crucial for HR professionals managing benefits for employees who are eligible for the HCTC. 
• Form 1099-INT (interest income): Reports interest income from bank accounts or investments. Similar to 1099-DIV, this form is not typically associated with employee or contractor payments but may be relevant in specific corporate financial contexts.
• Form 1099-NEC (nonemployee compensation): Used to report payments of $600 or more to non-employees, such as independent contractors, freelancers, and others who provide services to the company. 
• Form 1099-MISC (miscellaneous income): Reports various types of miscellaneous income, including rent, prizes and awards, medical and health care payments, and other income payments. 
• 1099-R (distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts): Used to report distributions from retirement plans, annuities, pensions, IRAs, insurance contracts, or profit-sharing plans. Relevant for HR professionals managing retirement benefits.
• Form 1099-SA (distributions from an HSA, Archer MSA, or Medicare Advantage MSA): Used to report distributions from a Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Medicare Advantage MSA. This form is important for HR professionals overseeing health benefit disbursements from these accounts.

Each of these forms has specific reporting requirements and thresholds, and it’s important for HR professionals to be familiar with these to ensure compliance with IRS regulations. 

Who Should File Form 1099?

Form 1099 should be filed by any business entity that has made certain types of payments during the tax year. This may include corporations, partnerships, or sole proprietorships. 

The form 1099 variations are generally used to report income from non-employment sources, so employers are not required to issue a 1099 form for wages paid to regular employees. However, businesses should issue a Form 1099 if they have paid at least $600 in rent, services, prizes, medical or health care payments, or payments to an attorney or independent contractor during the tax year.

In addition, financial institutions, such as banks and brokerage firms, should also use Form 1099 to report interest, dividends, and other types of income earned by their clients. 

Payers of reportable payments who fail to submit a correct Form 1099 to the IRS could be liable for penalties. It’s crucial to understand the requirements associated with Form 1099 to ensure compliance with IRS regulations, avoid fines, and maintain good standing.

Criteria for Reporting

The criteria for reporting a Form 1099 vary depending on the specific subtype of Form 1099 being issued. Here are some general guidelines and criteria for the most common versions HR professionals need to be aware of:

• Form 1099-DIV (dividends and distributions): Report if you pay $10 or more in dividends and other distributions on stock or $600 or more as part of a liquidation.
• Form 1099-H (Health Coverage Tax Credit (HCTC) Advance Payments): Report if you make advance payments of the health coverage tax credit for eligible individuals.
• Form 1099-INT (interest income): Report if you pay $10 or more in interest (other than interest on an IRA).
• Form 1099-NEC (nonemployee compensation): Report if you pay $600 or more in the year in non-employee compensation to an individual, partnership, estate, or in some cases, a corporation.
• Form 1099-MISC (miscellaneous income): Report if you pay at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest or at least $600 in rents, services performed by someone who is not your employee, prizes and awards, other income payments, medical and health care payments.
• 1099-R (distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts): Report if you distribute $10 or more from pensions, annuities, retirement or profit-sharing plans, IRAs, or insurance contracts.
• Form 1099-SA (distributions from an HSA, Archer MSA, or Medicare Advantage MSA): Report if you distribute funds from a Health Savings Account (HSA), Archer MSA, or Medicare Advantage MSA.

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Exceptions and Exemptions

There are several exceptions and situations where individuals or entities may be exempt from filing a Form 1099. These exemptions often depend on the type of payment, the relationship between the payer and the payee, and specific conditions set by the IRS. 

Here are some general exceptions:

• Corporations as Payees: Generally, payments made to corporations do not require a Form 1099, except for payments for medical or health care services, and, in certain cases, for legal services.
• Employee Payments: Payments for wages, salaries, and other compensation to employees are reported on Form W-2, not on Form 1099. However, there are specific instances, such as business travel allowances paid to employees, where the payment might not be reported on Form W-2 or 1099.
• Payments for Merchandise, Telecommunications, and Freight: Payments for merchandise, telecommunication services, storage, and similar items are generally exempt from 1099 reporting.
• Minimal Amounts: If the total payment to an individual or entity throughout the year does not meet the minimum threshold for reporting (for example, $600 for Form 1099-NEC), a Form 1099 is not required.
• Real Estate Transactions: Rent payments to real estate agents or property managers do not typically require a 1099-MISC from the property owner to the agent, but the agent may need to file Form 1099-MISC for owners who meet certain criteria.
• Tax-Exempt and Government Organizations: Payments made to tax-exempt organizations, including charitable and nonprofit organizations, are generally exempt from 1099 reporting requirements.
• Foreign Contractors: Payments for services performed outside the United States by a non-U.S. citizen are generally not reportable on Form 1099-NEC. However, other reporting requirements, such as Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, may apply.
• Scholarships and Fellowship Grants: Scholarship or fellowship grants that are not payment for services are generally not reportable on Form 1099.

It’s important for payers to be aware of these exceptions to avoid unnecessary reporting and to ensure compliance with IRS regulations. However, rules and exceptions can be complex, and they may change, so consulting with an American tax professional or referring to the latest IRS guidelines is always recommended for specific situations.

How to Fill Out Form 1099

It’s always important to refer to the most recent IRS instructions for Form 1099, including specific instructions for each different sub-version you need to fill out. However, I can give you some general tips to help you prepare in advance. 

Gather Necessary Information

To gather the necessary information for Form 1099, it’s important to maintain up-to-date records of your contractor’s information. Key pieces include the contractor’s legal name, address, and Taxpayer Identification Number (TIN). You’ll also need a record of the total compensation paid to the contractor throughout the year. 

To ensure accurate tracking, use your HR software or financial system to track payments consistently. Having this information at your fingertips will simplify Form 1099 preparation and prevent costly errors or potential noncompliance with IRS regulations.

Filing Deadlines

The annual deadline for filing Form 1099-NEC with the IRS and delivering it to recipients is January 31st of the following calendar year.

For other versions of the form, such as the 1099-MISC form, the filing due date is February 28th if filing by paper, or March 31st if filing electronically.

These are strict deadlines and companies or individuals who don’t file their forms by these dates may be fined between $60 to $330 per late form. 

However, it is possible to request an extension proactively to avoid penalties. An extension can be requested by submitting Form 8809. 

Electronic vs. Paper Filing

Filing Form 1099 electronically offers many benefits, such as automated calculations, real-time tracking, easy duplication, and faster submission to the IRS. It also significantly reduces the likelihood of errors, effectively increasing the efficiency and accuracy of tax reporting. 

Note: As of 2023, employers that need to submit more than 10 information returns (i.e., Form 1099s or others) are required to file electronically.

In contrast, paper filing requires manual effort which can be time-consuming and prone to errors. Plus, paper copies need to be correctly stored and managed, adding to the administrative burden. However, for small businesses with minimal transactions, this could be a feasible and low-cost option.

Note: If you do decide to file paper copies of your 1099 forms, you will also need to submit Form 1096 as an IRS cover sheet that summarizes all the hard copies you are submitting.

Potential Consequences of Non-Compliance

Failure to comply with Form 1099 requirements can lead to serious consequences, including fines and penalties. Plus, in addition to monetary repercussions, non-compliance may trigger a potential audit from the IRS, which can lead to unwanted scrutiny of a company’s financial affairs, significantly adding to stress levels.

Late Filing Penalties

The IRS has been known to impose late filing penalties ranging from $60 to $330 per late form filed, depending on how late the form is filed. Though this may seem insignificant in the case of one late form, companies who use numerous independent contractors may face a hefty penalty if multiple form 1099’s are filed late.

For businesses that are required to e-file but fail to do so, the IRS may apply an additional penalty per form, up to a maximum of $330 per form.

In addition, the IRS can impose a penalty of $550 per form for consistent non-compliance, if a trend of non-compliance is shown.

Incorrect Information Penalties

The IRS may impose a penalty of $330 per information return if the information submitted is found to be incorrect. Incorrect information may be as simple as an incorrect TIN number, incorrect payee surname, or errors in any of the dollar amounts reported. 

Remote Work and Form 1099 Compliance

With remote work now firmly established in our working world, many companies have also increased their use of independent contractors to supplement their workforce and access specialized skills. As the use of independent contractors increases, compliance with Form 1099 becomes increasingly important as these forms are necessary for accurately reporting compensation paid to non-employee independent contractors.

State Tax Obligations

On top of federal tax obligations, some states have their own reporting requirements for independent contractors. These can include filing equivalent state forms or additional documentation. The requirements can vary widely from state to state, so it’s important to be aware of the rules in the states where your remote workers reside.

Remote workers who move frequently or work in multiple states (often referred to as digital nomads), can create tax nexus issues. A tax nexus is a connection between a taxing jurisdiction (like a state) and an entity (like your business), which can establish tax filing obligations. Understanding how employing remote workers affects your tax nexus is essential to complying with state and local tax laws.

International Workers

For remote workers who are non-U.S. citizens and perform their work entirely outside the United States, you typically do not need to file Form 1099-NEC. However, it’s important to ensure that the relationship does not meet the IRS criteria for employment. If they do, this could open the door for employee misclassification, leading to other potential costs to correct the error. 

International tax laws and treaties may also influence reporting requirements, so it’s wise to consult an American tax professional to understand any remote work taxes and obligations.

Best Practices for Peace of Mind

Now that you have a better understanding of Form 1099, when you should prepare one, and the potential consequences of submitting incorrect or late information, you may be wondering how you can make this process easier on yourself going forward. Below are the three best strategies to use, in my opinion. 

Maintain Accurate Records

As is always the case with HR, finance, and tax preparation, accurate record-keeping is absolutely crucial. This includes keeping track of all payments that qualify for the 1099 category, storing detailed vendor information like full legal name, address, and tax ID number, and keeping copies of W-9 forms easily accessible. 

Efficient business tax software can also help you organize this information, thereby preventing errors and saving time.

Consult with Tax Professionals

While software can streamline most of your tax paperwork, knowing the intricacies of Form 1099 often requires consultation with American tax professionals. Their expertise helps ensure correctness and avoid penalties, and they can provide clear instructions and guidance on the necessity, timing, and criteria of issuing a 1099, thereby making the process less daunting.

Partner with an Employer of Record

Partnering with an Employer of Record (EOR) can simplify the process of managing 1099 forms for businesses. EORs are third-party organizations that handle employment-based responsibilities, such as tax reporting and compliance. They manage 1099 forms, ensuring accurate completion, timely submission, and proper filing. Their expertise helps reduce the risk of penalties related to incorrect or late 1099 form submission.

Having an EOR service handle your 1099 forms can provide peace of mind since their responsibility includes staying updated with any changes in 1099 form rules. This allows businesses to focus more on their core operations, knowing that an experienced partner is handling their HR regulatory compliance.

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