Form 1099 Requirements Explained

General Rules

• A Form 1099 needs to be issued and sent to all sole proprietors, independent contractors, partnerships, and LLCs¹ that you paid for services exceeding $600, including rent, interest, dividends, and royalties. The IRS has rules to decide if a worker is an employee or a contractor. For assistance in classifying your workers, check with the IRS here.
• Vendors that are incorporated are exempt.
• Attorneys are never exempt from this requirement (even if they are incorporated).
• During the year, whenever a check is issued for any of the above that requires issuance of Form 1099, make sure you obtain a completed and signed Form W-9, to be kept with your files. If anyone refuses to give you the information required, you may be obligated to deduct 24% withholding tax.
• You are not required to send a 1099 if you paid a contractor via PayPal Business or credit card. Instead, the credit card companies and payment companies will handle any required reporting and issue a form called the 1099-K, as required. 
• If you pay someone via PayPal's Friends and Family option, you will need to issue a 1099-NEC to them. When you use this method to transfer funds, PayPal assumes that it is a non-business transaction and doesn't include it in their 1099-K.

1099-MISC vs. 1099-NEC

Up until 2020, the 1099- MISC has been used as the standard 1099 form. What changed in 2020 is that instead of using 1099-MISC for everyone, the IRS reintroduced Form 1099-NEC (nonemployee compensation). You are now required to file 1099-NEC for all subcontractors/nonemployees' compensation instead of using 1099-MISC Box 7. Payments to attorneys in the course of your trade or business are reportable in box 1 of Form 1099-NEC. The 1099-MISC form should be used for all other vendors, rent payments, etc.

The following information is needed to prepare the forms:

1. Name of the business, in the case of an individual, the first and last name.
2. Tax ID or Social Security Number
3. Address
4. Amount paid

Deadline: The deadline for furnishing and/or mailing the Form 1099s to recipients will be different for the 2 1099 forms.

• Form 1099-NEC due date is January 31, 2023 (and must be e-filed by March 31, 2023.)
• Form 1099-MISC due date is February 15, 2023, to the recipient (and must be e-filed by March 31, 2023.)

Note of caution: all federal business tax returns (1120, 1120S, 1065, Schedule C, etc.) have a box asking whether any payments were made during the year that would require Form 1099 to be filed, and a box asking whether or not you filed all required Forms 1099. What this means to you is that when you sign your tax return, you are stating that, under penalties of perjury, to the best of your knowledge and belief, your tax return is accurate and complete. If all Forms 1099 are not filed, you could be held liable in the event of an IRS audit. That's why it is becoming more and more important that you comply with all 1099 reporting requirements.

The IRS also dramatically increased the penalty for failure to comply or for issuing the 1099 late.

Reach out to your payroll provider or accountant to prepare your 1099 Forms. You can read more about the topic here from the IRS.

Form 1099-NEC

1099-MISC 

Notice how Box 7 has been changed.

❓ Looking to learn more about employee payroll updates? Check out this article. 

¹ Generally, LLCs that elect to be treated as C or S Corps are exempt.