How to File a 1099 for a Contractor Step by Step

Filing a 1099 form for contractors is a necessary task for businesses that hire independent workers. This process ensures compliance with tax regulations and maintains transparent financial records. Accurately completing and submitting this document can help avoid penalties and simplify year-end reporting.

Who Must Issue the Form

Businesses and individuals who pay an independent contractor $600 or more during the tax year must issue a 1099 form. This IRS threshold applies to payments for services, not goods, and includes sole proprietors, partnerships, and certain non-profits. The IRS requires this reporting to ensure all income is documented and taxed.

It’s critical to distinguish between employees and independent contractors. The IRS assesses this based on the level of control a business has over how, when, and where work is performed. Misclassifying workers can result in penalties, so careful evaluation is essential.

Payments for professional services, such as consulting or freelance work, typically require a 1099 form. Payments to corporations are generally exempt, except for legal services. Understanding these details helps determine when a 1099 is necessary.

Contractor Details Needed

Accurate contractor information is key to filing a 1099 form. Obtain a completed Form W-9 from each contractor, which includes their legal name, business name (if applicable), address, and taxpayer identification number (TIN), either a Social Security Number (SSN) or Employer Identification Number (EIN). This information prevents errors and potential IRS penalties.

Verify the contractor’s TIN using the IRS TIN Matching Program, which confirms that the provided name and TIN match IRS records. Keep a detailed record of payments made to contractors, including dates, amounts, and the nature of the transactions, to ensure the 1099 form is accurate and aligns with financial records.

Filling Out the Form

Completing a 1099 form requires attention to detail. Start by entering the payer’s information, such as the business name, address, and taxpayer identification number, ensuring it matches IRS records.

Report the total payments made to the contractor in Box 1 of the 1099-NEC, which covers nonemployee compensation like fees and commissions. Double-check financial records to ensure consistency and accuracy.

If backup withholding applies—such as when a contractor fails to provide a valid TIN or is subject to IRS notification—report the withheld amount in Box 4. Proper reporting ensures compliance with IRS regulations.

IRS Submission Requirements

Submit the completed 1099 form to the IRS by January 31 of the year following the tax year in which payments were made. Missing this deadline can result in penalties ranging from $50 to $290 per form, with small businesses facing a maximum of $1,177,500 annually.

Forms can be filed on paper or electronically. Paper submissions require Form 1096 to summarize the total number of forms filed. Businesses filing 250 or more forms must use the IRS’s Filing Information Returns Electronically (FIRE) system, which reduces errors and streamlines the process.

Record Retention

The IRS recommends keeping copies of submitted 1099 forms and related records for at least three years after the return’s due date or filing date, whichever is later. This ensures preparedness for audits or inquiries.

Maintain comprehensive records, including contractors’ W-9 forms, payment records, and related correspondence. These documents provide evidence of compliance and create a clear audit trail. Digital storage solutions can improve efficiency and make it easier to access and retrieve records when needed.