What is a 1099?
It’s always nice to start with an easy question. While a lot of mystery seems to surround the topic, Form 1099 is nothing more than an IRS tax document used to document earned income received outside of a W-2 job or permanent salary. There are 22 types of 1099 forms including the 1099-MISC, the 1099-NEC, and the 1099-K.
For our purposes, we will focus on the 1099-NEC or 1099-Non-Employee Compensation that reports miscellaneous payments made to non-employee individuals for services provided to your business.
Who receives a 1099?
Any non-employee who does $600 or more worth of work for your company during the tax year will need to receive a 1099.
Some likely non-employees may include the temporary virtual assistant you hired from Fiverr or the marketing freelancer you found on Upwork to do a couple of hours of gig work for you. Are you noticing a common denominator here? “Non-employee” is your key to figuring out who needs a 1099. In Publication 15-A, the IRS gives guidelines for determining whether someone is an independent contractor/ “non-employee” but really it comes down to a non-employee is generally NOT subject to the business’ instructions about when, where, and how to work. Which brings us to our next question…
What is "non-employee compensation"?
It’s best to go straight to the source here: the IRS.
Per the IRS, if the following four conditions are met, you must generally report a payment as non-employee compensation:
- You made the payment to someone who is not your employee
- You made the payment for services in the course of your trade or business (including government agencies and non-profit organizations.
- You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
- You made payments to the payee of at least $600 during the course of the year
Do I need to issue a 1099-NEC for payments made for personal purposes?
Nope. You are only required to issue 1099-MISC forms for payments you made in the course of your trade or business. Personal purposes don’t count.
Are there exceptions to the 1099-NEC requirement?
Obviously. This is tax law we’re talking about.
Vendors, including LLCs, that operate as S- or C-corps do not need to be issued 1099s.
But there’s an exception to this exemption (you probably saw that coming). If you paid for legal services, you are required to send a 1099 regardless of how an entity is structured. (You can determine/verify business structure from the business’s W-9.)
The following actions similarly do not necessitate a 1099:
- Payments for merchandise, telegrams, telephone, freight, storage and similar items.
- Payments made via credit card or PayPal. The credit card processor will send a 1099K to the individual or company at the end of the year…
- …which means if you paid for legal services via credit card or PayPal, you don't need to send a 1099.
How can I make the 1099 process easier at year-end?
There are a few things you can do to make your life easier:
- Collect W-9s upfront from any vendor you expect to pay more than $600. How can you encourage vendors to provide their W-9s in a timely manner? Tell them you’ll pay them once it’s received. That typically does the trick.
- When doing monthly bookkeeping, record the vendor name in the payee line.
- Pay for things on a credit card if possible.
- If you are using Quickbooks Online, we encourage you to review your vendors, hit edit on the ones that should receive 1099’s, and check the “track for 1099’s” box. This will allow you to easily pull the “1099 Transaction Detail Report” in QBO. You may need to adjust some settings in that report for all vendors to show up.
Are there deadlines?
The filing date is January 31 for 1099-NEC with amount in box 7. Check with your state to see if you have to file copies of the 1099s with them.
If you’re searching for more information or in need of additional guidance, review these helpful resources:
- 1099online.com – XYPN Books has used this application to prepare 1099s. While a bit archaic, it gets the job done.
- QuickBooks 1099 E-file – Although we haven’t used this application, there will likely be efficiencies from using the same system for accounting and 1099 preparation.
- How to Determine Who Receives a 1099
- 1099 FAQs: What Small Business Owners Need to Know
If you have any 1099 questions that we didn’t cover here, or would like to know more about how XYPN Books can help you bring balance to your books and business so you can spend more time on your clients, get in touch!
Wolny, Nick. “All 22 Types of 1099 Tax Forms, Explained.” CNET, 8 February 2023, https://www.cnet.com/personal-finance/taxes/1099-tax-forms-explained/. Accessed 4 January 2024.
Meet Jocelyn Rucker, the self proclaimed Zena the warrior princess of bookkeeping and taxes. I believe in “rendering to God what is God’s and to Ceasar’s what is Ceasar’s,” nothing more, nothing less. I love sticking up for the small business owner, of which I have several in my family, helping them navigate the “clear as mud” tax code, legally. After all it’s not just what you earn, but what you keep & what you do with what you keep. Interested in all things finance, together with my fellow XY Bookies, we collaborate to help you do more of what you love.
From Portsmouth, New Hampshire, Dani started her bookkeeping career with XYPN books in 2021 and has grown to be the Accounting Manager. She loves to go fly fishing during the summer and when it starts to snow, she hits the ski slopes. Her favorite food is buffalo chicken pizza and her favorite book is The Alchemist, by Paul Coelho.
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