How to Create a 1099 Form for Your Business
Understand the business requirements for reporting non-employee payments. This guide helps you navigate the 1099 process for accurate and timely tax compliance.
Businesses are required to report certain payments made to non-employees to the Internal Revenue Service (IRS) using Form 1099. These information returns ensure that individuals and unincorporated businesses properly report their income. Navigating the requirements can seem complex, but this guide provides a walkthrough of how to determine the need for, prepare, and file the most common 1099 forms.
Determining Who Needs a 1099
A business must generally issue a Form 1099 to any individual, partnership, or Limited Liability Company (LLC) to whom it has paid $600 or more during the calendar year. This threshold applies to the total payments made throughout the year, not a single transaction. If your business paid a freelance graphic designer three separate payments of $300, for a total of $900, a 1099 would be required. The types of payments that trigger this requirement include compensation for services, rent, and royalties.
The nature of the recipient’s business entity is a factor in whether a 1099 is necessary. Payments made to individuals, sole proprietors, partnerships, and most LLCs are reportable. However, payments made to C-Corporations and S-Corporations are generally exempt from 1099 reporting.
The 1099 reporting requirement applies to payments made by cash, check, or direct electronic transfers. Payments made using credit cards or third-party payment networks like PayPal are excluded from this requirement. For these transactions, the reporting responsibility shifts to the payment settlement entity, which is required to report these payments to the IRS on Form 1099-K if annual thresholds are met.
To accurately determine who needs a form, a business should review its payment records for the entire calendar year to identify every non-corporate entity that received $600 or more. This process will create a definitive list of recipients for whom the business must prepare and file a 1099.
Information and Forms You Must Gather
You must collect specific information from each recipient, including the payee’s full legal name, their current mailing address, and their Taxpayer Identification Number (TIN). For an individual or sole proprietor, the TIN is their Social Security Number (SSN), while for a partnership or LLC, it is their Employer Identification Number (EIN).
The standard method for collecting this information is to have each payee complete and sign an IRS Form W-9, “Request for Taxpayer Identification Number and Certification.” It is a best practice to request a completed W-9 from a vendor or contractor before you issue their first payment. This form officially documents their name, address, TIN, and business entity type. The completed W-9 should be kept in your business records but is not filed with the IRS.
You must identify the correct type of 1099 form to use. The two most common forms for businesses are Form 1099-NEC and Form 1099-MISC. Form 1099-NEC, Nonemployee Compensation, is used to report payments of $600 or more to independent contractors for services. Form 1099-MISC, Miscellaneous Information, is used for other types of payments, such as rent, royalties of $10 or more, and prizes or awards totaling $600 or more.
You must obtain the official, scannable versions of the 1099 forms. You cannot simply download a PDF copy of the forms from the IRS website for filing with the government. The official forms are printed with special red ink that allows for machine scanning. These can be ordered for free directly from the IRS website or purchased from most office supply stores. Using a non-scannable, downloaded copy for your IRS submission can result in penalties.
Completing the 1099-NEC and 1099-MISC Forms
For payments to independent contractors, you will use Form 1099-NEC. The left side of the form requires your business’s information as the “PAYER,” including your name, address, and TIN. Directly below that, you will enter the “RECIPIENT’S” information, which includes their TIN, name, and full address, exactly as it appears on their Form W-9.
Box 1, “Nonemployee compensation,” is where you will enter the total amount of money you paid to the contractor for services during the calendar year. This figure should not include any payments made for the purchase of goods. Box 4 is used to report any federal income tax you were required to withhold under backup withholding rules, which can occur if a payee fails to provide a correct TIN. The remaining boxes are for less common situations.
For other types of business payments, you will use Form 1099-MISC. The process for entering the payer and recipient information on the left side of the form is identical to the 1099-NEC. For rental payments, such as for an office or equipment, you will enter the total amount in Box 1, “Rents.” If you paid royalties of $10 or more, that total goes into Box 2, “Royalties.”
Box 3, “Other income,” is a catch-all for payments of $600 or more that don’t fit elsewhere, such as prizes or awards. Payments made to an attorney in connection with legal services, even if the law firm is a corporation, are reported in Box 10, “Gross proceeds paid to an attorney.”
The Filing Process with Recipients and the IRS
You must furnish a copy of the completed Form 1099-NEC to the recipient and file with the IRS by January 31 of the year following the payment year. For Form 1099-MISC, the deadline to furnish a copy to the recipient is also January 31. The IRS filing deadline for Form 1099-MISC is February 28 if filing by mail, or March 31 if filing electronically.
If you are filing paper copies with the IRS, you must send the red, scannable Copy A of each 1099 form, and these forms cannot be folded. Your paper submission must be accompanied by a Form 1096, “Annual Summary and Transmittal of U.S. Information Returns.” This form acts as a cover sheet that summarizes the information from all the 1099s you are sending. You must complete a separate Form 1096 for each type of 1099 form you file.
Many businesses are now required to file electronically. Any business filing a combined total of 10 or more information returns, such as Forms W-2 and 1099s, must e-file. This can be done through the IRS’s Filing Information Returns Electronically (FIRE) system or the newer Information Returns Intake System (IRIS) Taxpayer Portal. No Form 1096 is needed for electronic submissions.
Some states have their own, separate 1099 filing requirements and deadlines. You should check with the relevant state tax agencies to ensure you meet any additional obligations.