The IRS form 1099-MISC, commonly abbreviated to just 1099, is a form that summarizes annual income from non-employee compensation for a tax filer. This form is what the IRS uses to calculate taxes on all the income independent contractors generate. If you paid more than $600 over the tax year to an independent contractor or contracting LLC, you will need to generate a 1099 form. This form is required so that the IRS can know how much income to charge the contractor, and so the contractor can know how much income to report to the IRS.
One notable exception to this rule is that you do not need to send a 1099 to a (standard, non-LLC) corporation that you contracted. You do however need to file a 1099 for any lawyers you contract during the year, regardless of their incorporation status.
Who Qualifies as an Independent Contractor?
An independent contractor is generally a temporary worker who provides services or goods to a company, following specific terms outlined in a contract. They are often paid on a per-project basis, and they must report their income to the IRS. No payroll taxes are withheld, and they typically do not receive any of the benefits that afforded employees, such as paid vacations, health coverage, or retirement plans.
Many businesses choose to work with independent contractors long-term because the arrangement provides the contractors with more freedom in how and where they work while saving the company a great deal of money and allowing them to hire more contractors.
Certain tax restrictions apply to independent contractors, so it is important to make sure they are legitimately qualified as such and are not W2 employees. Incorrectly classifying an employee as a contractor or vice versa could potentially result in fines or penalties from the IRS. You can find a calculator here to check which category someone you are working with should be filed under.
When to File a 1099 Form
1099s do not follow the usual April 15th tax deadline. Rather, the IRS requires all businesses to send out their 1099s by January 31st, so that the contractors can receive their copies in time to file their taxes with the IRS. This is true of W2s as well. You are then required to file them with the IRS on your end by the end of February if filing by mail, or by March 31st if filing digitally.
If your business fails to submit its 1099 forms by the required deadline, the penalties range from $30 to $100 and are capped at a total of $500,000 per year overall. If your company not only misses the deadline but fails to file its 1099s entirely for the year, those penalties increase to $250 for each form, with no upper limit!
Preparing a 1099-MISC Form
Collect all the accurate, up-to-date information on your contractors. They should have already filled out a W-9 form when they started working for you. This form includes important information like the contractor’s name, address, and social security number (SSN) or employer identification number (EIN). If feasible, it can be helpful to check with your contractors to see if any of this information has changed since the W-9 was completed. Technically if the contractor has not provided a W-9 or any of the required information, you can withhold 28% in taxes and send it directly to the IRS. This method is called a backup withholding which may not go over so well with contractors, so it is best to ensure you have the requisite W-9 forms up front to avoid any hassle later on.
After you have verified that you have all the information and that it is up to date, you are ready to obtain the blank 1099 forms from the IRS. You cannot use a blank form downloaded from the IRS website. Rather, the IRS requires you to use special forms that they produce, which are readable by their electronic scanning systems that process the completed forms. You can obtain these by calling the IRS tax form number (1-800-829-3676/1-800-TAX-FORM) or by visiting their website here.
You can also generate these forms using QuickBooks, and file them electronically. They also sell pre-printed paper forms which can be printed with that same information and mailed into the IRS.
Additional Forms and Timelines
You will need to either mail or physically hand the forms to each contractor by February 1st. The IRS can penalize you with fees as mentioned above if you fail to distribute the forms on time. The form you will be distributing to contractors is 1099 Copy B.
In addition to the 1099 forms themselves, the IRS requires you to submit a cumulative form called 1096 which summarizes all payments you made to contractors over the tax year. You will need to submit your form 1096 and the 1099 Copy A for each contractor to the IRS by March 31 if filing digitally, or the last day of February if filing by mail.
After you’ve filed all of those forms, you will have one copy of the 1099s left, which is 1099 Copy C. This copy is for your records. If the IRS ever has any questions or you were to be audited, this is the copy they may ask to see.
Make Filing Easier with Automation
Overall, filing 1099s can be a complex task that requires a bit of time and effort each year. Automated payroll software can make a large difference in expediting the process. If you would prefer not to use the software, you can also hire an accountant or tax preparation specialist to help you with filing these forms instead.