When Are You Required to Issue a 1099?
Don't just assume that your responsibilities end with issuing W-2s to the employees on your payroll; you may have other outgoing payments that need to be reported on Form 1099. You could find yourself in trouble with the IRS if you fail to file the appropriate returns.
The IRS tax Form 1099 is one of the IRS's most important tools combating underreporting of income. So what is a 1099, and when are you required to issue that form to a taxpayer?
Read on for all your 1099 questions answered.
What is Form 1099-MISC?
In case you were wondering what a Form 1099-MISC is...
It is an Internal Revenue Services (IRS) document that covers several types of business transactions, hence why it's labeled MISC for miscellaneous income. They are typically used for non-employee compensation or miscellaneous compensation. The 1099 is for small business owners or sole proprietors you have paid that isn't on your actual payroll, such as:
- Independent contractors
- Self-employed individuals
These service providers have to file a form 1099-MISC.
When are you not required to issue a 1099?
There are several scenarios where you do not need to report outgoing payments. Here are the most common examples:
Form 1099 is generally only necessary for business payments, not personal payments.
You do not need to issue a 1099 for services rendered to maintain your household. This includes housekeepers, babysitters, home painters, interior decorators, personal chefs, and gardeners.
Running your home is not a profitable venture and therefore you do not need to report these payments.
Payments to corporations
Except incorporated lawyers from law firms who give you legal services, you do not need to report payments to corporations on a Form 1099.
Payments of less than $600
As discussed previously, if the 1099 payments amount is under $600, you will not receive the form.
Payments to freelancers hired through third-party Services
If you hire a freelancer through a third-party service such as Upwork or Fiverr, you won't need to issue a 1099 as the third-party service is technically the one doing the hiring.
How do I know if I need to issue a 1099?
How do you know when an outgoing payment requires you issue a 1099? What are the reporting requirements? There are four questions to ask yourself when deciphering whether you need to issue a Form 1099-MISC.
1) What was the purpose of the payment?
Not all types of payments call for a 1099. For example, the purchase of goods or other tangible assets are not typically covered.
Some outgoing payments that warrant a 1099 include:
- Payments to an attorney
- Rent payments
- Healthcare payments
- Interest payments
- Crop insurance proceeds
- Services rendered
- Broker payments
- Payments to crew members of a fishing boat
2) Who were you paying?
1099's are issued for payments made to a payee like partnerships, individuals, and business entities. Essentially, they are issued to everyone except corporations.
If you paid an independent contractor such as a graphic designer, social media consultant, web designer, or copywriter more than $600 within the calendar year, you will need to issue them a 1099. The income meets the requirements and is reportable.
LLC's, or limited liability companies, should receive 1099s unless they have chosen to be taxed as a corporation.
Instructions on the Form 1099-MISC provide six specific instances where a 1099 is required for payments to corporations.
3) What was the method of payment?
You'll only need to issue a 1099 for direct payment methods such as cash, check, or bank transfers.
You don't need to report credit card or third-party transaction network payments on a Form 1099-MISC. They can be reported on a Form 1099-K.
4) What was the payment amount?
For payments below the minimum threshold of $600 or less, you do not need to file form 1099-MISC.
You can still file if you so choose. The recipient of the payment is not excused from reporting the payment regardless of the amount or whether you file.
Other 1099 examples
There are several scenarios and filing requirements where you do not need to report outgoing payments. Here are the most common examples:
Form 1099-K is for reporting receipts collected from third party transaction networks such as Cash App and PayPal. If you have an online store or pay employees or contractors via a third party site, you will likely need to report with a Form 1099-K.
This form is issued to shareholders when they receive cash, stock, or property in a transaction.
This form is only for organizations that are in the business of lending money. Form 1099-C is for reporting canceled debts.
For companies that issue stock and dividends, dividend payments must be reported on a Form 1099-DIV.
This form is used to report profits from real estate transactions. You do not need to issue this form if the real estate transaction is $250,000 or less for the sale of a primary residency or if the transferor is a government entity or corporation.
Financial institutions must issue this form for interest income payments exceeding $600 within one year.
What about backup withholding?
If you backup withhold, you must issue a Form 1099 no matter what the payment amount was. Normally the minimum threshold for payments before you need to issue a 1099 is $600.
However, if the contractor is subject to backup withholding, you must issue the appropriate Form 1099 even if you pay them under $600 in a year.
You don't want to find yourself in hot water with the IRS because you didn't file the appropriate claims. Be sure to file the appropriate Form 1099s for all relevant outgoing payments.
If you're still feeling uncertain about whether you're required to issue a 1099, consult a tax professional or CPA in the United States. It will save you headaches and worry over whether you're filing correctly at the end of the tax year.
You can also check the IRS.gov site for general instructions or call the IRS directly if you have further questions. The toll free number is 1-866-455-7538.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.