The 1099 form is used to report non-employment income that the taxpayer has earned throughout the fiscal year. This means that any income-driven source of income other than the salary or formal employment is called a non-employment income.
There are many different types of 1099 forms because there are many different categories of non-employment income that individuals can drive.
The 1099 form keeps a record of the income earned by the individual, the IRS matches your 1099 with other forms, and if there are any discrepancies found, then the notice is issued to pay tax for the missing amount. It is therefore essential to keep track of your 1099s.
A vendor is a company or person offering any good or service for sale. For tax purposes, any person who works for you renders any service or delivers a product to you is a vendor.
For instance, if you hired an attorney for legal consultation or proceedings, the attorney is your vendor. If you hired a contractor for landscaping, then the contractor is your vendor. To be a vendor, that person must not be employed by you. They must not receive any salary from you or be on your payroll.
The payments covered by 1099 include the following
- Rent payments
- Non-employee compensation
- Prizes and awards
- Crop insurance proceeds
- Medical and health care payments
- Cash payments for fish
- Payments to attorney
- Other income payments
In simple terms, whenever you make a 1099 payment, you have to report it to the IRS.
There are many different types of 1099 forms based on different sources of income, as discussed above. We are going to list some of the most common 1099s for the sake of clarity.
- 1099 – INT: Sent to banks and brokerage firms or anyone receiving over $10,000 in interest.
- 1099 – DIV: Sent to stockholders earning dividend income.
- 1099 – R: Sent to those who receive pension or distribution from IRAs or retirement funds.
- 1099 – S: Issued for real estate transactions.
- 1099 – MISC: Issued to those whose income does not fall in any category covered by any of the other 1099s.
- 1099 – NEC: In 2020, the government made slight changes and added certain categories to the 1099- NEC category.
For this article, we are concerned with the last two categories of 1099 mentioned above.
You need to report the 1099 – MISC for all the vendors who have rendered any service above $600 during the year. Form 1099 – MISC is to be filed for payments that are for
- Attorney fees
- Health care payments
- Individuals not considered as independent contractors under law.
You need to report the form 1099 – NEC if you received any service from a non-employed contractor/vendor, and the stated value of that service was $600 or above during the year.
You should also file the form 1099 – NEC if you have received any service from a non-employed contractor or vendor, with a value above $600, whom you also reported last year on the 1099 – MISC (Box 7).
You should also file a form 1099 – NEC for any non-employee contractor from whom you have withheld federal income tax under the backup withholding rules of taxation.
According to IRS, the form 1099 – NEC should be used for non-employees identifying as
- Any other non-employee
Before commencing work, you should ask to send the form W9 or W8BEN. Alternatively, you can send this form to them after their work is done, before paying them. They should provide the following details on this form.
- Legal name
- Name of business
- Social security number
With these details now, you can report the details of payment to the IRS. Once everything is in order, report the payment made to the vendor and tick the correct box that identifies their service.
You will also need to send form 1096 to the IRS, which lists all of your form 1099s in a series. If you have filed both 1099 – MISC and 1099 – NEC, you will have to attach a separate 1096 with each 1099.
Once done, send out copies of 1099 to the following
- IRS (including the 1096 with 1099)
- State tax department if required
- With yourself for your own record keeping.
Any mistakes made on 1099 should be promptly corrected. It is essential to keep track of all of your 1099s, especially those you have to report to the IRS.
This whole exercise aims to keep track of how much is being earned by those who are not informal employment. Persons earning income from means other than salary still have to pay taxes. Since their employer cannot directly deduct the taxes, the government must ensure that their taxes have been withheld. The whole exercise of form 1099 is done to ensure this process.
If you are unsure whether you should issue 1099 or not or the vendors you have to issue, it would be better to consult a tax professional to avoid any confusion and possible penalty. Tax matters should never be taken lightly.