Form 1099 Requirements for a Business Owner

As a business owner, understanding and issuing Form 1099 is a part of tax compliance. This IRS information return is used to track payments for services that are not traditional wages, and failing to manage this process correctly can lead to penalties. This article covers when to issue the form, what information is needed, the filing process, and how to handle forms your business receives.

Determining When to Issue a Form 1099

A business must issue a Form 1099 when it has paid $600 or more during the calendar year to a person or unincorporated entity for services performed in the course of its trade or business. The threshold applies to the total payments made during the year, not on a per-transaction basis. If your business withholds any federal income tax from a non-employee under backup withholding rules, you must file a 1099 regardless of the payment amount.

The specific form used depends on the nature of the payment. Form 1099-NEC, Nonemployee Compensation, is the primary form for reporting payments to independent contractors, freelancers, or other self-employed individuals for their services. Before 2020, this type of compensation was reported on Form 1099-MISC, but the IRS reintroduced Form 1099-NEC to create a distinct reporting mechanism for non-employee pay.

Form 1099-MISC, Miscellaneous Information, is now used for other specific types of payments. These include rent payments of at least $600, prizes and awards not related to services, and gross proceeds paid to an attorney. For example, if your business rents office space from an individual, you would report those payments on a 1099-MISC. Payments for an attorney’s general legal services are reported on Form 1099-NEC, while payments for legal settlements are reported on Form 1099-MISC.

You do not need to issue a Form 1099 for payments made to a C Corporation or an S Corporation. An exception to this rule involves payments for legal services, as payments to law firms, even if incorporated, must be reported. Payments made for merchandise, freight, or storage are also exempt. You also do not need to issue a Form 1099 for payments made with a credit card, debit card, gift card, or through a third-party payment network like PayPal. For the 2024 tax year, third-party networks are required to issue a Form 1099-K if payments exceed $5,000.

Information and Forms Needed for Issuing 1099s

Before a business can issue a Form 1099, it must collect specific information from the recipient using Form W-9, Request for Taxpayer Identification Number and Certification. It is a best practice to request a completed W-9 from any vendor or contractor before issuing their first payment. This proactive step ensures you have all necessary details on file well before year-end reporting deadlines, preventing potential compliance issues.

The Form W-9 is used to gather the recipient’s tax information. This includes their legal name and business name if they use one. The form also requires the recipient to indicate their federal tax classification, such as individual/sole proprietor or a type of corporation. Most importantly, the W-9 collects the recipient’s Taxpayer Identification Number (TIN), which will be either their Social Security Number (SSN) or an Employer Identification Number (EIN), along with their current mailing address.

You can obtain a blank Form W-9 from the IRS website to provide to your vendors. The recipient is responsible for completing the form accurately and signing it to certify that the TIN provided is correct and that they are not subject to backup withholding. Your business does not file the W-9 with the IRS; instead, you keep it on file to prepare the necessary 1099s and to provide it as proof of due diligence if questions arise.

The Process for Filing and Furnishing 1099s

Businesses have two primary methods for filing 1099s with the IRS: electronic filing and paper filing. The IRS mandates electronic filing for businesses submitting 10 or more information returns in a calendar year. The electronic system, known as Filing Information Returns Electronically (FIRE), receives the data and provides an acknowledgment of receipt.

For businesses that file by mail, an additional form is required. Form 1096, Annual Summary and Transmittal of U.S. Information Returns, must be completed and sent with the paper 1099s. This form acts as a cover sheet, summarizing the information from the accompanying returns; you cannot combine 1099-NEC and 1099-MISC forms under a single Form 1096.

For Form 1099-NEC, the deadline to furnish Copy B to the recipient and to file Copy A with the IRS is January 31 of the year following the payment. For Form 1099-MISC, the deadline to furnish a copy to the recipient is also January 31. However, if you are reporting payments for substitute dividends, interest, or gross proceeds paid to an attorney, the deadline to furnish the form is February 17, 2025. The IRS filing deadlines for Form 1099-MISC are February 28 for paper filings and March 31 for electronic filings.

After submitting the forms, it is important to retain copies for your business records. If you file electronically, you will receive a confirmation that the IRS has received your submission. For paper filers, using certified mail can provide proof of timely filing.

Handling 1099s Received by Your Business

When your business receives a Form 1099-NEC or 1099-MISC, it signifies that another business has reported payments made to you to the IRS. The first action you should take is to review the form. Verify that your business name, address, and Taxpayer Identification Number (TIN) are correct, and confirm the payment amount accurately reflects the income you received.

For a sole proprietor or a single-member LLC, the income reported on a Form 1099-NEC is considered self-employment income. This income must be reported on Schedule C (Form 1040), Profit or Loss from Business. The total amount from all sources, including amounts from 1099s and any other business income, is entered as gross receipts or sales on Schedule C to determine your net profit or loss for your personal Form 1040.

If you discover an error on a 1099 you received, you cannot alter the form yourself. Instead, you must contact the payer who issued it and request a corrected form. The payer is responsible for issuing a new Form 1099 with the “CORRECTED” box checked at the top. It is important to keep records of your communication with the payer regarding the correction request.

Should the payer fail to issue a corrected form, you are still obligated to report your actual, correct income on your tax return. You should report the correct income figure on your Schedule C and attach a statement to your tax return explaining the discrepancy. This demonstrates transparency to the IRS and can help mitigate potential issues that may arise from the mismatched figures.