Do Trusts Issue 1099s to Vendors?

Trusts often make payments to vendors, but whether they must issue a Form 1099 depends on the type of payment and the tax classification of both the trust and the recipient. The IRS requires certain entities to report specific payments to ensure proper income reporting. Understanding these requirements helps trusts avoid penalties.

To determine if a trust must issue a 1099, factors include the nature of the service provided, the amount paid, and the recipient’s tax status.

Entity Classification and Reporting Responsibility

Trusts are classified for tax purposes as either grantor or non-grantor trusts, with further distinctions such as simple or complex trusts. These classifications determine how income is reported and whether the trust must issue tax forms to vendors.

Grantor trusts, where the grantor retains control over trust assets, do not file separate tax returns. Instead, income and deductions pass through to the grantor’s personal tax return. Since the trust is not a separate taxable entity, it generally does not issue 1099s.

Non-grantor trusts, however, are separate entities that file Form 1041, U.S. Income Tax Return for Estates and Trusts. These trusts may need to issue 1099s if they make reportable payments to vendors.

A trust’s obligation to issue 1099s also depends on whether it operates a trade or business. The IRS requires businesses to report certain payments, but personal trusts that do not engage in business activities may be exempt. However, if a trust owns rental properties, operates a farm, or conducts other income-generating activities, it may be considered engaged in a trade or business, triggering 1099 reporting requirements.

Payments Subject to 1099

Trusts must determine whether payments to vendors fall under IRS reporting requirements. Common reportable payments include professional service fees, rent, and royalties.

Professional Services

Payments for professional services are generally reportable on Form 1099-NEC (Nonemployee Compensation). This includes fees paid to independent contractors, attorneys, accountants, and consultants who are not employees of the trust. If total payments to an individual or unincorporated entity exceed $600 in a calendar year, a 1099-NEC must be issued.

For example, if a trust hires an independent accountant and pays $1,200 over the year, it must issue a 1099-NEC. Payments to corporations are generally exempt, except for legal services. The IRS requires that payments to attorneys, even if they operate as a corporation, be reported on Form 1099-NEC.

To ensure compliance, trusts should collect a Form W-9 from service providers before making payments. This form provides the recipient’s taxpayer identification number (TIN) and tax classification, helping the trust determine whether a 1099 is necessary. Failure to issue a required 1099 can result in penalties ranging from $60 to $310 per form, with a maximum annual penalty of $3,783,000 for large entities in 2024.

Rent Payments

If a trust pays rent for office space, land, or equipment, it may need to issue a Form 1099-MISC to the landlord or property owner. The IRS requires reporting of rental payments totaling $600 or more in a calendar year unless the recipient is a corporation.

For instance, if a trust leases farmland and pays $10,000 annually to an individual landowner, it must issue a 1099-MISC. However, if the payment is made to a real estate management company structured as a corporation, reporting may not be required. Trusts should verify the recipient’s tax classification by obtaining a Form W-9 before making payments.

If the trust rents property from a tax-exempt organization, such as a nonprofit, it generally does not need to issue a 1099. Additionally, if the trust pays rent to a real estate agent or property manager rather than directly to the property owner, the agent is responsible for issuing any required 1099s to the landlord.

Royalties

Trusts that pay royalties for intellectual property, mineral rights, or other licensing agreements must report these payments on Form 1099-MISC if they total $10 or more in a calendar year.

For example, if a trust owns oil-producing land and pays $500 in royalties to an individual mineral rights holder, it must issue a 1099-MISC. Similarly, if a trust pays $50 in book royalties to an author, it must report the payment. Unlike payments for services or rent, the corporate exemption does not apply to royalties, meaning that even if the recipient is a corporation, the trust must still issue a 1099.

Trusts should track royalty payments throughout the year to ensure compliance. If multiple small payments are made to the same recipient, they should be aggregated to determine if the $10 threshold is met. Proper recordkeeping and obtaining a Form W-9 from royalty recipients can help avoid reporting errors and potential IRS penalties.

Minimum Payment Thresholds

The IRS sets specific dollar amounts that trigger 1099 reporting requirements. Payments for services, rent, and other common expenses generally follow the $600 threshold, meaning if a trust pays a vendor less than this amount in a year, no 1099 is required. However, royalty payments must be reported once they reach $10. Payments made in lieu of dividends or tax-exempt interest also require reporting if they exceed $10.

Payments made through third-party networks or payment processors like PayPal, Venmo, or credit card companies are typically reported by the payment processor, not the trust. Under IRS regulations, these transactions are reported by the processor if they meet the $20,000 and 200-transaction threshold for third-party settlement organizations under IRS rules. If a trust pays a vendor via credit card rather than by check or direct deposit, it may not need to issue a 1099, as the responsibility shifts to the processor.

Filing and Distribution Steps

Trusts must first gather the necessary information, including the recipient’s name, address, and taxpayer identification number (TIN), which should be obtained using Form W-9 before any payments are made. Incorrect or missing TINs can lead to backup withholding obligations, requiring the trust to withhold 24% of future payments.

Once the information is verified, trusts must complete the appropriate version of Form 1099, ensuring that payments are categorized correctly. The IRS provides specific boxes for different types of income, such as Box 1 for rent and Box 2 for royalties on Form 1099-MISC. Misclassification can result in IRS notices or audits. Trusts must also complete Form 1096, which acts as a transmittal summary when filing paper copies with the IRS.

The deadline for furnishing 1099s to recipients is January 31, while electronic filings with the IRS must be submitted by March 31. Trusts filing 10 or more forms must use the IRS FIRE (Filing Information Returns Electronically) system per recent e-filing mandates. Given the penalties for late or incorrect filings—ranging from $60 to $310 per form—many trusts use accounting software or third-party filing services to streamline compliance.

Noncompliance Consequences

Failing to issue required 1099s can result in financial penalties and increased IRS scrutiny. The severity of the penalties depends on how late the forms are filed and whether the failure was intentional. If a trust submits the form within 30 days of the deadline, the penalty is $60 per form. If the delay extends beyond 30 days but is corrected by August 1, the penalty increases to $120 per form. Forms filed after August 1 or not filed at all can result in a $310 penalty per form. If the IRS determines that the failure was intentional, the penalty is the greater of $630 per form or 10% of the unreported payment amount.

Beyond monetary fines, noncompliance can trigger IRS audits, which may lead to further tax assessments and interest charges. If a trust repeatedly fails to issue 1099s, the IRS may impose backup withholding requirements, forcing the trust to withhold 24% of future payments to vendors. This creates additional administrative burdens and can harm relationships with vendors who may not receive their full payments. Many states also require 1099 filings, adding another layer of compliance. Ensuring timely and accurate reporting helps trusts avoid unnecessary financial and legal complications.