1099 Rules for Business Owners
Over the past few years there have been a number of changes and updates regarding the reporting rules for the illusive 1099-Forms. Many business owners simply guess as to what the rules are and oftentimes get exasperated and just give up choosing to file nothing at all. This can be a dangerous result as the penalties can add up quickly.
If you are not sure which forms you many or may not need to send, be sure to get help from a bookkeeper or tax pro. That is your best bet for getting this right. Feel like you can handle it one your own? Read more to find out what you need to know.
First, you have to determine WHICH 1099 form to send out; and, my oh my, there are a number to choose from including:
1099-A, Acquisition or Abandonment of Secured Property
1099-B, Proceeds From Broker and Barter Exchange Transactions
1099-C, Cancellation of Debt
1099-CAP, Changes in Corporate Control and Capital Structure
1099-DIV, Dividends and Distributions
1099-G, Certain Government Payments
1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
1099-INT, Interest Income
1099-K, Merchant Card and Third Party Network Payments
1099-LTC, Long-Term Care and Accelerated Death Benefits
1099-MISC, Miscellaneous Income
1099-NEC, Nonemployee Compensation (this is an old form that was previously discontinued in 1982 but recently made a comeback in the year 2020)
1099-OID, Original Issue Discount
1099-PATR, Taxable Distributions Received From Cooperatives
1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530)
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Second, the general rule is that business owners must issue one of the above 1099 forms to each person to whom they have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099's for payments made for personal purposes. You are required to issue 1099 reports only for payments you made in the course of your trade or business.
The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to send a 1099, it is subject to a minimum penalty of $250 per statement, with no maximum. Bottom line, the penalties can add up!!
Here are the basics you should know.
Who are you required to send a Form 1099? You are required to send Form 1099 to vendors or sub-contractors during the normal course of business you paid more than $600, and that includes any lawyer, individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or Estate. Check with your bookkeeper to find out if you should file a 1099-NEC or a 1099-MISC.
Who are considered Vendors or Sub-Contractors? Essentially, this is a person or company you have paid for services that isn’t your employee. Not sure if you should be classifying this person as a Vendor vs an Employee? use the QuickBooks Wizard tool to figure this out! You will likely send a 1099-NEC (Nonemployee Compensation) form to these individuals if they qualify.