How to Create a 1099 for an Independent Contractor
Navigate the process of issuing Form 1099 to independent contractors. Our guide clarifies your business's reporting duties for proper tax compliance.
When a business pays an independent contractor for services, it must often report these payments to the Internal Revenue Service (IRS) using Form 1099. These forms serve as information returns, meaning they inform the IRS about money that might be taxable to the recipient. For the business owner, issuing a 1099 is a part of tax compliance that ensures payments to non-employees are properly documented.
Determining Your 1099 Filing Requirement
A business must file a Form 1099 if it pays an independent contractor $600 or more for services during the calendar year. This requirement applies only to payments made in the course of your trade or business, as personal payments are not reportable.
For payments to independent contractors, freelancers, or other self-employed individuals for services, you must use Form 1099-NEC, Nonemployee Compensation. Examples of payments reported on this form include fees for a graphic designer, payments to a consultant, or compensation for a contract software developer.
A different form, Form 1099-MISC, Miscellaneous Information, is used for other types of business payments. This includes payments of at least $600 for things like rent, prizes and awards, or payments to an attorney. It is also used for reporting royalty payments of at least $10. An exemption exists for payments made to most C Corporations and S Corporations, meaning a 1099 is not required for these entities, though exceptions for attorney’s fees do apply.
Required Information and Form Completion
To prepare a Form 1099-NEC, you must gather accurate information from the contractor using IRS Form W-9, Request for Taxpayer Identification Number and Certification. It is best practice to have the contractor complete and return a Form W-9 before you issue their first payment. This form provides the necessary details for the 1099, including the contractor’s full legal name, business name, mailing address, and federal Taxpayer Identification Number (TIN). For an individual, the TIN is their Social Security Number (SSN), while for a business it is an Employer Identification Number (EIN).
Once you have the contractor’s completed W-9, you can fill out the Form 1099-NEC. You will need your own business information, including your legal name, address, and TIN. You will then transfer the contractor’s details directly from the W-9 to the recipient section of the 1099-NEC.
In Box 1, “Nonemployee compensation,” enter the total amount of compensation paid to the contractor for services during the calendar year, not including expense reimbursements. Box 4 is used to report any federal income tax you withheld under backup withholding rules, which can be required by the IRS in certain situations. Boxes 5 through 7 are for reporting state tax information, if applicable.
When filing by mail, you must use official, scannable copies of Form 1099-NEC. These forms are printed with special red ink and cannot be downloaded from the IRS website for filing purposes. You can order official forms for free from the IRS or purchase them from an office supply store. Using a non-scannable copy can result in processing delays and potential penalties.
Filing Procedures and Deadlines
If you file by mail, you must send the scannable Copy A of each Form 1099-NEC to the IRS. This mailing must include Form 1096, Annual Summary and Transmittal of U.S. Information Returns, which serves as a summary cover sheet. A separate Form 1096 is required for each type of 1099 form filed.
Electronic filing is mandatory for businesses filing 10 or more information returns in total, including forms like the 1099-NEC and 1099-MISC. The IRS offers a free online portal called the Information Returns Intake System (IRIS) for e-filing. Filing electronically eliminates the need for Form 1096.
You must also provide the contractor with their copy of the form, known as Copy B, by the deadline. This allows them to use the information to prepare their own income tax return. Many states also have their own 1099 filing requirements and may require you to submit a copy to the state tax agency.
The deadline for Form 1099-NEC is January 31 of the year following the payment year. This date applies to furnishing Copy B to the contractor and filing Copy A with the IRS, regardless of whether you file by mail or electronically. Failing to meet this deadline can result in penalties that increase over time.