Small Business Guide to issuing form 1099

Each year our clients come to us with questions concerning who needs to receive a 1099.  While it can be overwhelming, deciding who should receive a 1099 can generally be determined with a few questions.  In this article we address some frequently asked questions from our clients concerning 1099s.   

Where to start: how do I know if someone should receive a 1099 or not?

The first step is to determine if they are considered an employee or independent contractor.  An independent contractor receives a 1099, an employee does not.

This determination generally comes down to who has control: your business or the worker.  Consider who has control over the services performed, how the worker is paid, and the relationship between the two parties.  An independent contractor generally sets their own work schedule, determines their own pay rate, uses their own tools, and has a relationship with you on a project-by-project basis. 

The worker is an independent contractor, but which 1099 form should they receive?

There are two main 1099s that our clients will be concerned with, the 1099-NEC and 1099-MISC. 

The 1099-NEC is for nonemployee compensation to whom you have paid at least $600 for:

• Services performed by someone who is not your employee

• Payments to an attorney for their services

But what if they used parts and other materials to perform the service?  Do I issue them a 1099-NEC for just the service piece?  (Ex. Lawncare specialists charging you for his time AND mulch)

The amount that you include in Box 1 of the 1099-NEC should include parts and materials.  It will be up to the 1099-NEC recipient to deduct these parts and materials on their tax return.

 Ok, so when should I file a 1099-MISC?

The 1099-MISC covers a wider range of payments.  The most common expense that our client base needs to report on the 1099-MISC is Rent but a more expansive list can be found at the IRS website. Better yet, call us and we can do it for you!

What are the situations in which I do not have to file a 1099?

In these situations, you do not need to issue a 1099:

• You are not engaged in a trade or business.  In other words, you are an individual.

• You are engaged in a trade or business and the payment was to a company that was incorporated.  Do not send 1099s to C-corporations or S-Corporations unless it’s a lawyer.  To say this another way, a lawyer or law firm should receive a 1099-NEC for their services even if they file as a C-corporation or S-Corporation.

• The sum of all payments made to the person or unincorporated business is less than $600 in one tax year.

• You paid the vendor via credit card.  If you paid the vendor via credit card, the credit card company will report the payment on their own 1099 called a 1099-K.

In bullet two above, you say I do not need to send a 1099 to someone who is incorporated. How do I know if they are incorporated or not?

You simply need to ask them for a completed Form W-9.  Some businesses may already have them but if not, you can send them a blank copy to fill out.  A blank W-9 can be found on the IRS website. 

This article does not cover all types of 1099s and is not an all-inclusive list for the different scenarios for filing a 1099-NEC or 1099-MISC, but we hope it provides some clarity and direction for filing season! We file hundreds of 1099’s every year for our clients.  If you have further questions on this topic, feel free to schedule a call.