What are 1099s? Do I need to file 1099s? Who gets a 1099? These are questions that many business owners are asking around the end of the year.
There are 3 main 1099 forms: Form 1099-NEC, Form 1099-MISC, and Form 1099-K. Each of these forms serves a specific purpose, but all share the same basic function: to report non-employee income to the IRS. The complex and recently updated requirements for issuing 1099s have left business owners with many questions. In this article, we’ll break down the basics of each form that all business owners need to know.
The information in this article is based on the guidance of the IRS as of January 2022. The IRS will issue revised instructions later this year. Check back for updates as the rules may change.
What is Form 1099-NEC?
Form 1099-NEC is used to report non-employee compensation. Form 1099-NEC is issued to freelancers, gig workers, or independent contractors that you pay throughout the year.
You must issue a 1099-NEC to report payments that meet the following conditions:
- Payment is made to a person who is not your employee.
- Payment is made for services in the course of your trade or business.
- Payment is made to an individual, partnership, estate, or in some cases a corporation.
- Payment total is at least $600 for the year by cash or check.
As of 2020, the IRS reinstated the use of Form 1099-NEC to report non-employee compensation that had previously been reported using Form 1099-MISC.
What is Form 1099-MISC?
In short, Form 1099-MISC is used to report payments other than non-employee compensation made by a trade or business to others.
According to the IRS, you must issue a 1099-MISC to each person you have paid throughout the year for the following:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
- Rents.
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
- In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Remember, non-employee compensation is no longer reported on Form 1099-MISC as of 2020 and is reported using Form 1099-NEC.
What is Form 1099-K?
The rules for issuing Form 1099-K, Payment Card and Third-Party Network Transactions, have changed in 2022 as a part of the American Rescue Plan Act passed in 2021. Receiving Form 1099-K used to be rare; however, with the new rules there will be an influx of Form 1099-K in 2023.
Form 1099-K, Payment Card and Third-Party Network Transactions, is an IRS information return that reports the annual gross amount of all reportable payment transactions made through a payment card or third-party payment network.
Payment cards include:
- credit cards.
- debit cards.
- gift cards.
- prepaid cards.
Third-party payment networks include platforms that:
- process card payments such as PayPal, Venmo, and CashApp.
- connect independent sellers with customers such as eBay and Etsy.
- are used for gig-workers such as Uber, Lyft, Fiverr, and UpWork.
Who issues form 1099-K?
Form 1099-K is issued by payment settlement entities such as those listed above. Each payment settlement entity that you’ve used during the calendar year will send you a Form 1099-K if you have reached the minimum reporting threshold, which is discussed below.
Who receives form 1099-K?
The reporting threshold for Form 1099-K has changed significantly from previous years. For years prior to 2022, you would only receive a 1099-K for payments that met the following requirements:
- From all payment card transactions (e.g., debit, credit, or stored-value cards)
- In settlement of third-party payment network transactions that exceed $20,000 AND include more than 200 such transactions
For calendar year 2022, retailers and businesses who accept online card payments and other electronic payments can expect to receive a 1099-K for activity that meets the following requirements:
- From all payment card transactions (e.g., debit, credit, or stored-value cards)
- In settlement of third-party payment network transactions totaling $600 or more (any number of transactions)
The new law clarifies that only third-party network transactions made for the purchase of goods and services.
Other Notes About Form 1099-K
Beware of Accepting Nontaxable Payments
Remember, Form 1099-K only applies to business transactions, not personal ones such as splitting a dinner bill with a friend. Because third-party payment processors are not always able to distinguish between business and personal transactions, you should avoid using your business accounts for personal transactions. For example, if you are splitting a dinner bill with a friend, do not have them pay you using the Venmo, CashApp, or PayPal account that you use for business. Personal payments like this are typically not considered as taxable income and should not be reported on your tax return. Keep these transactions on a personal account to avoid potential issues.
What to Do With Form 1099-K
You will receive Form 1099-K from each third-party settlement entity on which you exceed the minimum reportable payment threshold. Form 1099-K reports the gross amounts of reportable payments and does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts. It is important that you keep detailed records in order to report such information when filing your taxes.
Once you have gathered all of your business income, including that recorded on each Form 1099-K you received, you will use that information to complete your tax return.
We understand that the new rules regarding Form 1099-K are complex and can be confusing. If you have further questions, reach out to us.
Other Important Information About 1099s
Deadline to File
The deadline for filing 1099s is January 31. If this date happens to fall on a weekend, the deadline will be the next business day.
Be sure to mark the deadline on your calendar and set yourself a reminder. If you fail to file your 1099s by the deadline, you will face a penalty from the IRS.
Penalties for Not Issuing 1099s
The penalty for not issuing 1099s is $250 for each 1099 not issued. There are also penalties for filing 1099s late. Penalties for filing late are $50 or $100 per 1099, depending on how late they are filed. Knowing the rules and being proactive can help prevent you from having to worry about the penalties.
The IRS will issue revised instructions later this year. Check back for updates as the rules may change.
Still have questions? We’re here to help.
We know that all this 1099 talk can be overwhelming and make your head spin. We’re here to help. If you have questions regarding the new 1099 rules or need assistance filing your business’s 1099s, reach out to us. We want to be partners in your success.
