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22 January, 2023

1099s for Small Business Owners – What Do They Mean and Why They’re Important?

As a small business owner, do you pay vendors or contractors? Do you pay them more than $600 a year? 

If the answer to both questions is yes, then you should become familiar with the 1099 tax form.

What is a 1099 Form? 

If in the past year, your business has paid any freelancers or part-time workers more than $600, you will be required to provide them with a 1099 form. The purposes of a 1099 tax form are two-fold: 

ü  Allows you to report wage information to the IRS 

ü  Enables your part-time worker or freelancer to do their taxes

A 1099 is a tax form enabling an entity to report payments made to another entity as income, excluding wages paid to employees. For instance, if a payment is made to an independent contractor, for work rendered, or if a business pays stock dividends to investors, then thebusiness making the payment has to issue a specific type of 1099 form to report this transaction. 

1099 tax forms are similar to a W2 form companies issue to their employees annually. The issuer and the recipient of a 1099 form will utilize the document to assist in determining their annual taxable incomes.

How Do You Know If a Vendor Needs a 1099 Form? 

Business owners should request vendors to complete a W-9 form prior to them working for their company. The W-9 includes information necessary about the vendor for filing taxes. It should provide your business with the vendor’s mailing information, a Tax ID number, and business structure. 

If a vendor has incorporated their company or has opted for a S Corporation or

C Corporation tax treatment, a 1099 form should not be required. 

Types of Income Payments Reported on a 1099 Tax Form 

Although 1099 tax forms are related to income paid to an independent contractor or vendor, they can additionally be used to report a wide array of other income payments and miscellaneous income. 

Here are common types of income payments reported on a 1099 form: 

  • State or local tax refunds 
  • Medical and healthcare payments 
  • Rent or royalty payments 
  • Dividends and interest payments 
  • Non-employee compensation 
  • Commissions 
  • Prizes and awards 
  • Gambling winnings 
  • Fishing boat proceeds 
  • Crop insurance proceeds

There are still more types of income payments in addition to those listed above. 

Types of 1099 Forms 

While a 1099 may be a typical IRS form, it is available in numerous versions. 

These are some of the most common types of 1099 forms: 

1099-MISC – Reports payments such as royalties, substitute payments in lieu of dividends, rent, prizes and awards, crop insurance proceeds, medical and health care payments. 

1099-DIV – Reports payments to investors including cash dividends. 

1099-INT – Reports interest payments from brokerage firms, banks, and other investment firms. 

1099-NEC – Reports nonemployee compensation like income earned as a free-lancer, independent contractor, or a self-employed individual. 

1099-B – Reports income from commodities, certain types of bartering and other securities, and stock sales. 

1099-G – Reports unemployment payments or local tax refunds. 

1099-R – Reports payments from taxable pension retirement plans or individual retirement accounts (IRAs), in addition to some life insurance plans and annuities. 

1099-S – Reports real estate transactions making money, and includes sales of land, commercial or industrial properties, or residential properties. 

Exceptions When a 1099 Form is Not Required 

There are specific circumstances when a 1099 form is not necessary. For example, these types of vendors do not receive a 1099-NEC or a 1099-MISC: 

o   Limited Liability Companies (LLC) taxed as C Corporations or

S Corporations. 

o   Businesses with C Corporation or S Corporation entity structures. 

o   Companies selling merchandise, freight, storage, or other similar things. 

1099 Rules Business Owners Must Observe 

As many other types of income taxes have been altered over the years, 1099 forms have undergone numerous changes. That is why it is essential for business owners to stay informed about the newest 1099 rules, and they include the following: 

$600 Threshold 

Your business must send copies of Form 1099-NEC to the IRS and contractors if you pay more than $600 in compensation. This $600 threshold also applies to other 1099 forms to report payments like non-qualified deferred compensation, rent, prizes, crop insurance proceeds, and more. 

New Forms 

As of the 2020 tax year, the IRS reintroduced the 1099-NEC, which had not been around for many years. Before 2020, payments to non-employees like independent contractors, which were subject to self-employment taxes, were reported on a 1099-MISC. That income is now reported on a 1099-NEC. 

1099 Change in 2022 

As of the 2022 tax year, credit card companies and payment apps – like PayPal and Venmo –  will be required to send 1099-K forms to people who are self-employed and small businesses receiving payments up to $600 or more through their platforms.   

Before 2022, these types of companies were required to report payments to the IRS when an account received in excess of $20,000 and had 200 or more transactions during the year. 

Important Dates and Deadlines 

Businesses have to provide vendors and contractors with a 1099 form, in addition to filing a copy with the IRS, by Jan. 31. If this date falls on a weekend, the due date is the following Monday.

There are certain types of 1099 forms requiring IRS filing by Feb. 28, however, copies still must be furnished to recipients by Jan. 31. 

Look to DrillDown Solution for Expert Tax Planning Services for Your Small Business 

DrillDown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on the needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business. 

Our Provo, Utah Tax Planning Services are just what your small business needs.


Adam

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