Your Ultimate Guide to 1099s

Your Ultimate Guide to 1099s

Updated November 1, 2023

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Understanding 1099s is a common issue for businesses during tax season. In this guide, we have included the information you need to know about the 1099 form, such as what a 1099 is, why these forms need to be completed, how they should be prepared, and to whom they should be sent.

What is a 1099?

1099s are information returns that businesses are required to prepare to report various payments made in the course of their trade or business to individuals and/or other businesses. Companies can be penalized for failure to comply with the 1099 filing requirements. These penalties have increased significantly over the last few years. For more information on the increase in information return penalties, visit https://www.irs.gov/government-entities/federal-state-local-governments/increase-in-information-return-penalties-2.

 

What is the difference between the 1099-MISC and the 1099-NEC?

Form 1099-NEC should be used to report nonemployee compensation (NEC). Form 1099-MISC has been redesigned due to the creation of Form 1099-NEC and no longer includes box 7. 

The chart below compares the 1099-MISC Form and the 1099-NEC Form.

1099-MISC vs 1099-NEC chart

If your business files more than ten 1099s and/or W-2s, you are required to file electronically.

Steps for Businesses to file 1099-MISC

Step 1: Collect the following information for each contractor.

Taxpayer Identification Number (TIN)

A TIN will be either their Social Security number or federal identification number. Mail the contractor a W-9 form to request the number and identify the type of entity prior to the initial payment to the vendor. A W-9 form provides proof that the identification number being used is the number they gave you in the event you receive a notice from the IRS of a discrepancy and a request for backup withholding. If a recipient does not provide a TIN, leave the TIN box blank on the 1099 and file it anyway. Keep on file any correspondence proving you tried to obtain the TIN. Backup withholding of 24% is required on payments made to persons without a TIN or refusing to give a TIN, or on payment made following receipt of an IRS notice requiring backup withholding. If there is backup withholding from a payment, the regular filing limits for 1099s do not apply. In other words, a 1099 must be prepared regardless of the amount of the payment made to them.  

  • Contractor’s legal name and address. (Verify this is correct on their W-9 form.)
  • The entire amount you paid the contractor during the year.

Step 2: Complete the 1099-MISC form.

  1. Complete the PAYER’s name, street address, city or town, state or province, country, ZIP or foreign postal code, and telephone section with your company’s information.
  2. Enter the Calendar year (In previous years, the calendar year was printed on the form)
  3. In the PAYER’s TIN box, enter your company’s TIN.
  4.  In the RECIPIENT’s TIN box, enter the contractor’s TIN. For sole proprietors, including single-member LLCs, use their Social Security number or Employer Identification Number; Note - the IRS prefers the Social Security number. 
  5. Complete the RECIPIENT’s name, street address (including apt. no.), city or town, state or province, country, ZIP, or foreign postal code section with the contractor’s information.

Note for sole proprietors, including single-member LLCs - show the individual’s name on the first line and the “doing business as” name on the second line. You may not enter only the business name. If you are using a Social Security number for reporting, you should not enter the business name, only the individual’s name or it is very likely you will receive a backup withholding notice.  If payments were issued in more than one person’s name, only the name that corresponds to the TIN should be shown on the name line. Show other names of recipients or business names in the space below the first line, if desired, before the address.

  1. In box 1, report any rents paid. Include amounts for office rental, equipment rental, or pasture rental. Do not include amounts paid directly to a real estate agent.
  2. In box 2, report royalties paid of $10 or more.
  3. In Box 3, report other unearned income not subject to self-employment tax. Include things like punitive damages and prizes and awards paid to non-employees that were not for services performed. Any payments made to deceased employees must be reported in Box 3. If an employee dies during the year, payments for wages, vacation, and other compensation (excluding pension distributions) made after the date of death but in the year of death are considered earnings subject to Social Security and Medicare withholding. These payments are not considered employee wages for federal purposes. The amount paid after the date of death, but in the year of death, is reported on a 1099-MISC in Box 3. The employee may receive a W-2 and a 1099 in the year of death. Payments made outside of the year of death to the beneficiary or estate must be reported on a 1099-MISC in Box 3. The 1099 should be prepared using the name and identification number of the person receiving the payment, not the deceased employee’s name, as these payments are not considered wages and no W-2 filing is required.
  4. Use Box 4 to indicate any federal income tax/backup withholding.
  5. If the business pays anyone for fishing boat proceeds, you will need to review the instructions for Box 5. For additional information, see https://www.irs.gov/pub/irs-pdf/i1099msc.pdf.
  6. In box 6, report payments of $600 or more to medical or health care providers regardless of whether or not they are incorporated. There are some exemptions for tax-exempt hospitals, extended care facilities, and government-owned.
  7. In box 7, check this box if the Payer made direct sales of $5,000 or more.
  8. Use box 9 to report crop insurance proceeds.
  9. Gross proceeds to an attorney from a settlement are reported in box 10.
  10. Section 409A deferrals are reported in box 12
  11. In box 14, report nonqualified deferred compensation income.
  12. Use boxes 15, 16, and 17 to report state taxes withheld, state identification number, and amount of income earned in the state, respectively.
  13. Review the instructions and complete additional boxes if they apply.

Step 3: Submit Copy B to the Contractor no later than February 1, 2021.  

Step 4: Complete IRS Form 1096 Transmittal for each type of 1099 form you file. View a sample IRS Form 1096 here. 

Step 5: Submit Copy A of Forms 1096,1099-NEC, and 1099-MISC to the IRS.

The due date for Form 1099-NEC is on or before January 31, 2024. This is for both paper and electronic filing procedures. The 1099-MISC Form is due on or before February 28, 2024, if you file by paper, or by April 1, 2024, if you file electronically.  If your business files more than ten 1099s and/or W-2s, you are required to file electronically.

Step 6: (For Pennsylvania Businesses Only) Submit a copy of the 1099-NEC form to the Pennsylvania Department of Revenue.

The entity issuing the 1099 forms must have either a PA employer withholding account or register separately for a 1099 withholding account number if there are withholdings reported.  If the entity is issuing ten or more 1099 forms, they must be filed electronically.

If the entity is issuing nine or fewer 1099s and has zero PA withholdings, the forms should be mailed to:

PA Department of Revenue

Bureau of Individual Taxes

1099-R/1099-MISC Forms

PO Box 280509

Harrisburg, PA  17128-0509

               

If there is any tax withheld on any distributions, the 1099-R/1099-MISC forms should be mailed to:

PA Department of Revenue

Bureau of Individual Taxes

PO Box 280412

Harrisburg, PA 17128-0412

 

Steps for Businesses to file 1099-NEC

Step 1: Collect the following information for each contractor.

Taxpayer Identification Number (TIN)

A TIN will be either their Social Security number or federal identification number. Mail the contractor a W-9 form to request the number and identify the type of entity. A W-9 form provides proof that the identification number being used is the number they gave you in the event you receive a notice from the IRS of a discrepancy and a request for backup withholding. If a recipient does not provide a TIN, leave the TIN box blank on the 1099 and file it anyway. Keep on file any correspondence proving you tried to obtain the TIN. Backup withholding of 24% is required on payments made to persons without a TIN, refusing to give a TIN, or on payment made following receipt of an IRS notice requiring backup withholding. If there is backup withholding from a payment, the regular filing limits for 1099s do not apply. In other words, a 1099 must be prepared regardless of the amount of the payment made to them. For example, a 1099-NEC form for lawn service does not need to be filed for amounts paid totaling less than $600; however, if there was backup withholding, a 1099-NEC would be filed for all amounts, including those under $600.

  • Contractor’s legal name and address. (Verify this is correct on their W-9 form.)

  • The entire amount you paid the contractor during the year.

 

Step 2: Complete the 1099-NEC form.

  1. Complete the PAYER’s name, street address, city or town, state or province, country, ZIP or foreign postal code, and telephone section with your company’s information.

  2.  In the PAYER’s TIN box, enter your company’s TIN.

  3.  In the RECIPIENT’s TIN box, enter the contractor’s TIN. For sole proprietors, including single-member LLCs, use their Social Security number or Employer Identification Number; Note - the IRS prefers the Social Security number.

  4. Complete the RECIPIENT’s name, street address (including apt. no.), city or town, state or province, country, ZIP, or foreign postal code section with the contractor’s information.

    Note for sole proprietors, including single-member LLCs, show the individual’s name on the first line and the “doing business as” name on the second line. You may not enter only the business name. If you are using a Social Security number for reporting, you should not enter the business name, only the individual’s name or it is very likely you will receive a backup withholding notice. If payments were issued in more than one person’s name, only the name that corresponds to the TIN should be shown on the name line. Show other names of recipients or business names in the space below the first line, if desired, before the address.

  5. In box 1, report any nonemployee compensation in the amount of $600.00 or more. A nonemployee is any provider you paid services for in 2020. Examples include independent contractors, freelancers, vendors, consultants, or other self-employed individuals. Do not use Form 1099 NEC to report personal payments, employee wages (use Form W2), gross proceeds to an attorney, or payments of rent to real estate agents or property managers.

  6. In box 4, report any federal income tax or backup federal withholding (if required under backup withholding rules) regardless of the amount.

  7. In boxes 5, 6, and 7, report any state tax withheld, state identification number, and amount of earned income in the state (if applicable).

  8. Review the instructions and complete additional boxes if they apply. 


Step 3: Submit Copy B to the Contractor no later than February 1, 2024.  

Step 4: Complete the IRS Form 1096 Transmittal for each type of 1099 form you file. For a sample IRS form 1096, see https://www.irs.gov/pub/irs-pdf/f1096.pdf.

Step 5: Submit Copy A of Forms 1096,1099-NEC, and 1099-MISC to the IRS.

The due date for Form 1099-NEC is on or before January 31, 2024. This is for both paper and electronic filing procedures. The 1099-MISC Form is due on or before February 28, 2024, if you file by paper or by April 1, 2024, if you file electronically. If your business files more than ten 1099s and/or W-2s, you are required to file electronically.

Step 6: (For Pennsylvania Businesses Only) Submit a copy of the 1099-NEC form to the Pennsylvania Department of Revenue.

The entity issuing the 1099 forms must have either a PA employer withholding account or register separately for a 1099 withholding account number if there are withholdings reported.  If the entity is issuing ten or more 1099 forms, they must be filed electronically.

If the entity is issuing nine or fewer 1099s and has zero PA withholdings, the forms should be mailed to:

PA Department of Revenue

Bureau of Individual Taxes

1099-R/1099-MISC Forms

PO Box 280509

Harrisburg, PA  17128-0509

               

If there is any tax withheld on any distributions, the 1099-R/1099-MISC forms should be mailed to:
 

PA Department of Revenue

Bureau of Individual Taxes

PO Box 280412

Harrisburg, PA  17128-0412

 

Contractor vs. Employee Infographic

Infographic: Contractor vs. Employee

New for 2023

  • Previously, you needed to have over $20,000 and 200 transactions in a year to receive a 1099-K from a third-party payment network (such as PayPal or Venmo). However, in 2023, the threshold has been lowered to $600 without regard to the number of transactions.
  • If your business files more than ten 1099s and/or W-2s, you are required to file your 1099s electronically.

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