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1099-MISC Tax Basics

Last Updated:
December 28, 2017

Have you paid an independent contractor to perform services for your company or business? Then you likely need to report their pay to the IRS and to them via form 1099-MISC. The form 1099-MISC is an information return used to help businesses/individuals accurately report their income on their tax returns and provides a mechanism for the IRS to ensure that the income was properly reported.  

What is a 1099-MISC form?

A Form 1099-MISC is generally used to report any payments made to a service provider or contractor. This helps the IRS track how much they can expect in taxes from contractors and those who are self-employed. Because they are technically a ‘business-of-one’ when contracting, independent contractors must handle their own taxes whereas companies automatically withhold for taxes with their traditional, W-2 employees.

There’s also not just one 1099 form, there are a series of forms. For the purposes of this guide, we’re focusing on the most common form used to report compensation for services paid to an independent contractor: the 1099-MISC.

What is an independent contractor?

Who files a 1099-MISC form?

The company or business owner that makes payments to the independent contractor for their services is required to report those payments to the IRS and also send a copy to the contractor.  

Who receives a form 1099-MISC?

The contractor receives a copy for their records and the IRS also gets a copy — either through electronic filing or paper mailing (plus a 1096 form, a transmittal form used just for filing with the IRS using snail mail).

Most corporations don’t get 1099-MISCs

Another important point to note: there is no need to send 1099-MISCs to corporations. This includes S-Corporations and C-Corporations -- they also don’t receive 1099 1099-MISCs. 1099-MISCs should be sent to single-member limited liability company (or LLCs) or a one-person Ltd. But not an LLC that’s treated as an S-Corporation or C-Corporation. Here’s another way to remember:

  • Sole proprietor = Do send 1099-MISC
  • Unincorporated contractor or partnership/LLP =  Do send 1099-MISC
  • An LLC that elects treatment as an S-Corporation or C-Corporation = Do NOT send 1099-MISC

Alas, there are some exceptions to this rule. 1099-MISCs should be issued for:

  • Attorney’s fees even if the lawyer is incorporated
  • Gross proceeds paid to an attorney (such as for legal settlements)
  • Payments to for-profit medical care providers

For full detail regarding the guidelines above, including a more exhaustive list of when to send a 1099-MISC, please refer to the IRS guidelines

Business services only

Another important requirement to know: 1099-MISCs only need to be sent for services provided for a business, not for goods or merchandise. 1099-MISCs also don’t need to be sent for non-business, personal services. For example, if a company had a website designed by a freelancer, that company may issue the freelancer a 1099-MISC for that service. Whereas, let’s say the company’s CEO hired a landscaper to mow the lawn at her house. The CEO does not owe the landscaper a 1099 –MISC because the landscaper provided a personal service, not a service for the business.  

The $600 threshold

Typically, companies are only required to send 1099-MISCs to contractors who’ve been paid $600 or more in a calendar year.

The credit card payment exception

In the case that a company paid for services using a credit card or through a third party payment network, the rules for 1099-K are applicable for reporting, not a 1099-MISC.

What information do you need for filing form 1099-MISC?

In order to file a 1099-MISC, you’ll need several key pieces of information about your contractor. Usually, this information is collected by a W-9 form which can be filled out by the contractor before providing work or services.

W-9 Form

The most important pieces:

  • Legal name of the contractor (Line 1)
  • Business name if different from the contractor's name (Line 2). If an entity is a single-member LLC, then it’s disregarded for information reporting purposes. As such, it would need to input its name on Line 2 while the single-member owner's name would be input on Line 1 (and the owner's TIN would be included on the Form W-9).
  • The contractor’s federal tax classification (Line 3)
  • Exemption codes (Line 4) Another purpose of the Form W-9 is to document a payee's status as exempt if the "eyeball test" cannot be used. For example, if an entity is incorporated and has the word "Company" in its name as opposed to "Inc", then the entity would need the Form W-9 (Line 4) to determine the entity's status as an exempt recipient for information reporting purposes.
  • Their address (Line 5,6)
  • Tax Identification Number: either the Entity Identification Number or Social Security Number (Part 1)

When do you issue 1099-MISCs?

For 2017 payments, companies must send 1099-MISCs to recipients by January 31 of the following year. Companies also must send copies of each 1099-MISC sent to recipients to the IRS. The deadline to the IRS is January 31 whether 1099s are filed electronically or by mail. This deadline applies to Form 1099-MISC when reporting non-employee compensation payments in Box 7. Otherwise, paper filings must be filed with the IRS by February 28 and electronic filings by March 31. But, since it's likely that at least some of the 1099 forms any business sends will be 1099-MISCs, for practical purposes, January 31st becomes the key filing date.

Just to put that in another handy format:

  • January 31 -- Send 1099 form to contractors
  • January 31 -- Mail 1099-MISC forms to the IRS
  • January 31 -- E-file 1099-MISC forms with the IRS via FIRE

Extensions

See our guide to requesting a delivery extension which explains how to request an extra 30 days to deliver forms to recipients.

See our guide to requesting a filing extension which explains how to request an extra 30 days to file forms with the IRS.

State filing considerations

Keep in mind that your state may also have requirements and separate deadlines for reporting 1099s and filing them. You should talk with your tax advisors to understand your state filing requirements.

See our guide to State 1099 Taxes

Mailing vs. e-Filing 1099s with the IRS

Anyone issuing more than 250 1099-MISC forms is actually required to e-file with the IRS. Even if less than 250 are being filed, the IRS still prefers e-filing.

Should you issue a 1099-MISC or 1099-K?

1099-MISC

Most of the time, businesses issue their contractors 1099-MISCs, which are used for cash payments made directly to an independent contractor to contractors for business services. The threshold for sending a 1099-MISC is if a contractor has been paid $600 or more over the course of the year.

1099-K

As online and digital payments become more pervasive, many companies may need to issue a Form 1099-K, which is typically reserved for electronic payments and payments by credit card to contractors. Traditionally, third-party settlement organizations  have used this form to report payments transactions.

The reporting threshold for 1099-Ks is much higher than for 1099-MISC. Third-party settlement organizations are required to issue a 1099-K after 200 transactions and paying out over $20,000.

Learn more: Form 1099-K Basics

Process options

It’s important to begin planning for 1099 filing and delivery early because it can easily turn into a huge headache if the deadline rolls around while you’re still missing important contractor or payments information. We suggest starting to prepare as early as possible and be aware of your options:

Handle filing and delivery on your own: With this option, you compile, print, deliver, and file all the 1099s on your own. You’d probably want to consider this option if you expect to organize and issue very few 1099s.

1099-MISC Filing Service: Services like Payable exist to help you with this process of gathering information and filing. This is ideal for companies with dozens to thousands of contractors.

Hire a CPA or professional tax advisor: They can help determine whether you have a reporting obligation for payments made to contractors and may prepare the forms for you. They typically will handle filing with the IRS as well. 

*When in doubt at any stage of the 1099 process, it’s highly recommended to consult a tax advisor to better understand your requirements.

Penalties for not filing

If you neglect to file 1099s when you should or file too late, then you could face hefty fines. Depending on how late 1099s are filed, penalties range anywhere from $50-$260 per failure, per form, with a maximum of $3,193,000. In other words, a payor can be assessed $260 per form for failure to file with the IRS and $260 for failure to furnish the same form to the payee (for a maximum of $6.3 million).

1099-MISC IRS Helpful Links

It’s hard to find the most relevant and up-to-date IRS information on 1099 taxes on the internet these days. So, we’ve gathered the best, most authoritative information here:

Filer Instructions:

Forms (includes recipient instructions):

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