When does your business need to send a 1099?
If your business pays someone for services and it’s more than $600 during the year, you may be required to send them a form 1099-NEC before January 31st.
What does a 1099-NEC do?
It reports to the IRS and to the person who provided a service to you the total amount your business paid them during the year. It is also a form that would be requested in the case of an audit to validate your expenses. If you don’t file 1099’s when they’re required, you can be penalized for filing them late and/or your business deduction related to that expense could be disallowed (which means more tax for you)! Yikes.
How do you know if you need to send a 1099-NEC?
In general, if your business paid someone more than $600 during the year for services, then you need to send them a 1099.
Below is a list of some of the most common expenses for online service providers, coaches and creators. This list is NOT complete, talk to your CPA if you have questions about specific expenses.
- Services performed by someone who isn’t your employee:
- A copywriter
- A virtual assistant
- An online business coach
- A social media contractor
- A consultant
- An accountant or bookkeeper
- A law firm/attorney
- Web designer
- Photographer
Remember, these are for services provided, NOT for something like templates purchased.
Like most things, there are a few rules and exceptions to this:
- If the payment was to a corporation or an s corporation (or an LLC taxed as either of those entities), then you don’t need to send a 1099 (but still need a W-9 on file for your records).
- If your expense was for legal services, then it doesn’t matter if they are incorporated or not, you still need to send them a 1099 if you paid them more than $600 for services.
- You don’t have to send a 1099 if your payments were for merchandise, templates, supplies, or other similar items.
- *IMPORTANT* If you paid your service providers through a third party payment processor like PayPal, Venmo business, or a credit card then they (the payment processors) are responsible for filing forms when necessary, so you don’t need to send 1099’s. Note: Zelle, your personal Venmo account or a friends and family PayPal account WILL NOT send the forms, so in those instances, you would need to send a 1099. Also, if you paid someone via direct transfer, ACH or by check, you’ll need to send a 1099 if required.
What information do you need from your service provider in order to give them a 1099-NEC?
You will need their name, address, and their tax ID number. You can collect this data using a form W-9. You may even be familiar with this form yourself, because someone may be sending you a 1099! (Side note: If you provide a service and you don’t receive a 1099, you are still required to report any income on your tax return that you received).
This is a good practice: have any service provider you hire fill out a W-9 before you send them their first payment if you think you will pay them more than $600 during the year so you have their information on file and aren’t trying to track it down later.
Now that you have the 1099-NEC information, what do you do with it?
After you complete the 1099’s for the vendors, make sure you give them each a copy by January 31st.
You also need to send a copy of the 1099’s with a form 1096 (which summarizes all of the 1099’s that you filed) to the IRS. These returns are due by January 31st as well. Unfortunately, the IRS doesn’t have a fill-in form you can fill out and then submit to them but here are some sites that allow you to fill in the data and file electronically.
https://payroll.intuit.com/additional-services/1099/efile-1099/
You also may be required to send a copy of the 1099’s to your state, you will have to check on your state rules to see if you’re required to do so.
This is a summarized version of the 1099 process. For complete instructions on the who, what, where of the 1099’s, click here for the IRS instructions.
