IRS Form 1099 Reporting for Small Business Owners in 2020

As of 2020, businesses are required to send copies of Form 1099-NEC to the IRS and contractors if they pay $600 or more in compensation to non-employees throughout the year. In prior years (2019 and before), this was reported on 1099-MISC. Form 1099-NEC is due Feb. 1, 2021 to report payments made during the 2020 calendar year. You can print blank 1099-NEC form copies from the web or fully completed forms from your payroll software (many offer it for free).

What Is a 1099 Form?

Form 1099 is an information return. Its primary purpose is to give non-employees a record of the total annual payments they received and need to report during tax time (you won’t withhold or pay any employer taxes on the money you pay contractors); 1099 forms also alert the IRS who received untaxed payments throughout the year, just in case those individuals don’t self-report and pay their tax bill.

Just to reiterate, as of Jan. 1, 2020, the most common 1099 form for small and mid-size businesses is Form 1099-NEC; this is to report non-employee compensation. In prior years, these contractor payments were included in Form 1099-MISC. If you need to file a 1099 for non-employee income paid out in 2019, you would use the 2019 1099-MISC.

Note, there are other types of 1099 forms (aside from 1099-NEC and MISC) that we’ll discuss later in this article.

Download IRS Form 1099-NEC Here

Who Is Required to File Form 1099-NEC?

Businesses are required to file Form 1099-NEC if they have paid at least $600 to contractors during the previous calendar year. Form 1099-NEC is typically issued to individuals, sole proprietors, and partnerships. In some circumstances, businesses may need to issue a Form 1099-NEC to corporations.

When to File Form 1099-NEC

The due date for filing Form 1099-NEC is Jan. 31 for most businesses; however, when that date falls on a weekend, it’s due the following Monday. By this Jan. 31 deadline, businesses furnish one copy of the form to report payments made during the previous calendar year to their contractors and vendors. Businesses are required to file another copy of Form 1099-NEC with the IRS—and sometimes their state tax agency—by the same deadline.

How to File Form 1099-NEC With the IRS

Businesses file one copy of Form 1099-NEC with the IRS and can use paper forms or software to prepare the Form 1099-NEC. Alternatively, a business might want to hire an accountant to prepare and file the forms, especially if they’re already using one to do payroll.

The different ways a business can prepare Form 1099-NEC include:

• Fill out paper forms: Order blank forms from the IRS for free; be sure to get Form 1096 in addition to Form 1099-NEC (Form 1096 is a summary of all the 1099 forms you issue and should be sent the IRS alongside the 1099 copies); fill out the forms, then mail to the IRS and your contractors.
• Download PDF forms: Use the downloadable Form 1099-NEC to prepare the copy you send to contractors and vendors; download the 2020 version of Form 1020-NEC from the IRS website, then type in information on-screen, and print and mail to your vendors.
• Use payroll software: Many payroll software have a feature contractors can use to print the completed form themselves, or you can use it to email and print the forms.
• Use accounting software: Some accounting software programs can prepare, print and e-file Form 1099-NEC; for example, see How to Complete 1099 Forms in QuickBooks.
• Use Form 1099 software: There are a handful of desktop and web-based software programs for preparing and e-filing Form 1099.
• Hire an accountant: Tax professionals can prepare and e-file your 1099 forms in addition to your income tax return.

How to Prepare Form 1099-NEC in Four Steps

1. Have All Independent Contractors Complete a Form W-9

Before paying a contractor for any work, it is important to have a completed Form W-9 signed by the independent contractor. Form W-9 shows information you will need for preparing Form 1099-NEC, such as the contractor’s name, address, and taxpayer identification number. Go through your records and find out if you need to request Form W-9. Store them with your payroll forms.

The links for downloading Form W-9 are:

• Form W-9: This is the blank Form W-9; have your contractors fill this out, sign it, and send you a copy
• Instructions for the requester of Form W-9: These instructions are for businesses and cover issues, such as when to ask for a Form W-9 from a contractor

If you don’t want to worry about handling paper tax forms, you can use payroll software like Gusto to do it for you. Contractors enter their personal information on electronic W-9 forms that automatically transfer to year-end 1099 forms, so you don’t have to fill out anything. The software even lets you pay independent contractors via direct deposit or check, all for $6 per employee each month they’re paid. You can sign up for a free trial today.

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2. Track Payments Made to Independent Contractors

Businesses can keep track of payments made to contractors and vendors manually or by using software. At the end of the year, compile a report showing the total amount of payments to each contractor. Analyze this report to determine which contractors you need to send a Form 1099-NEC.

3. Complete Form 1099-NEC & Submit to IRS

Once you have a report showing total amounts paid to each contractor and the Form W-9, you are in a position to prepare the Form 1099-NEC. Fill out a Form 1099-NEC for each contractor or vendor as required. After reviewing each Form 1099-NEC for accuracy, file one copy with the IRS, either by mail or electronically.

Here is what Form 1099-NEC looks like, along with a brief description of what type of payments are reported in each box:

Box 1. Non-employee compensation

Report payments of $600 or more made to a non-employee. In general, businesses report payments to accountants and independent contractors in this box. Normally, you can report non-employee compensation paid to individuals and partnerships.

Boxes 2-3. Non-employee compensation

No information is required in this box, so leave it blank.

Box 4. Federal income tax withheld

Enter backup withholding in this box. If you withheld any federal tax from a contractor, you are required to file a Form 1099-MISC, even if the payment amount is less than the threshold.

A contractor might be subject to backup withholding if, for example, the contractor did not provide you with their federal taxpayer identification number or Social Security number. This is why it’s important to ask your contractors to give you a signed Form W-9 before paying them.

Box 5-7. State information

These boxes need to be completed for those businesses who are required to file copies of Form 1099-MISC with state tax departments.

4. Provide Form 1099 to Independent Contractors & File With IRS

Provide one copy of Form 1099-NEC to each contractor or vendor and file all Forms 1099-NEC with the IRS. You will also have a copy you can send to your state tax department, if required. Send out these 1099 forms after you review them for accuracy and completeness. Businesses hand-deliver, mail, or electronically send Form 1099-NEC to their contractors. When filing with the IRS, either mail in paper forms or electronically file them.

Tips for filing Form 1099-NEC with the IRS include:

• Using the downloadable PDF: You can download Form 1099 PDF to prepare copies for your contractors and records from the IRS website.
• Use the official “red” version for mailing to IRS: The IRS strongly prefers that businesses use the official version of Form 1099-NEC, which is printed in red ink; this makes it easy for the IRS to scan into their systems; you can order the official version of Form 1099 for free on the IRS website.
• Use payroll software, an accounting program, or an accountant for e-file: If you prefer to file your Forms 1099, you will need to use software that can e-file the forms or work with someone who has access to tax software.
• Include form 1096 when sending to IRS: Form 1096 functions as a cover sheet, telling the IRS how many 1099 forms you are filing and other information; use the official “red” version if you are mailing in your forms to the IRS.

Form 1099-NEC Examples

We provide two examples of how to prepare Form 1099-NEC. Our first example is a 1099 for an outside consultant. In our second example, we describe a situation where a Form 1099-NEC is not required because the amount paid is less than the reporting threshold.

1099 Reporting Scenario #1: 1099 Form Required

Mary is an independent human resources (HR) consultant. Your firm contracted Mary to set up your human resources information systems and provide training on the system. She is an independent contractor.

In 2020, your business paid Mary $50,000 for non-employee compensation. Since $50,000 exceeds the $600 threshold for non-employee compensation, your business is required to file a Form 1099-NEC.

You show non-employee compensation of $50,000 in Box 3. This means that Mary will have to claim $50,000 of taxable earnings on her tax return.

Below is a sample Form 1099-NEC that you would issue to Mary:

1099 Reporting Scenario #2: Form 1099-NEC Not Required

Chris is an independent QuickBooks ProAdvisor. Your firm hired Chris to set up your QuickBooks files and train you on how to use the system. Chris also reviews your financial statements every quarter to make sure that you are doing things correctly. Chris is an independent contractor.

In 2020, your business paid Chris a total of $599 of non-employee compensation. Since $599 is less than the $600 threshold for non-employee compensation, your business is not required to file a Form 1099-NEC for Chris.

Other Common 1099 Forms

There are several varieties of Form 1099. Form 1099-NEC is the most common for small and mid-size businesses, because this is the form used to report payments to independent contractors. However, before 2020, 1099-MISC was the most common.

Common varieties of Form 1099 for small and mid-size businesses are:

• Form 1099-MISC: Issued by businesses to report miscellaneous non-employee payments other than those to contractors, like those to attorneys, for rents, awards, and so forth
• Form 1099-CAP: Issued by corporations to report changes in corporate control and capital structure
• Form 1099-DIV: Issued by corporations and financial institutions to report dividends paid to shareholders; C-corps may need to issue this form to their shareholders
• Form 1099-INT: Issued by businesses and financial institutions to report interest payments; businesses may need to use this form to report interest paid to individuals or partnerships

IRS Form 1099-MISC

Since Form 1099-MISC was the primary 1099 used by businesses before the 2020 changes, let’s go over when you would need to file it along with the new instructions and layout. Remember, Box 7 is no longer used for non-employee compensation and will not be included on this 1099 version. Use 1099-NEC if you need to report contractor payments.

Form 1099-MISC must be filed by March 1 if you file by mail and March 31 if you file electronically.

The minimum thresholds at which businesses are required to form 1099-MISC are:

Instructions for filing 1099-MISC are as follows:

Box 1. Rents

Report all types of rent payments if $600 or more during the calendar year. This includes rent for office space, warehouse space, machine, or equipment rentals.

Box 2. Royalties

Report total gross royalty payments if $10 or more during the calendar year. Royalties include payments to license intangible property like patents, copyrights, or trademarks. Royalties also include fees paid by a publisher to an author or literary agent.

Box 3. Other Income

Report payments of $600 or more for prizes, awards, and certain other types of payments that do not fit into any other box on Form 1099-MISC.

Other types of payments reported in Box 3 include:

• Prizes and awards, including the fair market value of non-cash items
• Payments made to a deceased employee (see Page 5 of the 2020 Instructions for Form 1099-MISC)
• Payments of Indian gaming profits to tribal members (see Page 4 of the Instructions for Form 1099-MISC)
• Payments for participating in a medical research study
• Termination payments to former self-employed insurance salespeople
• Punitive damages, damages for nonphysical injuries and illnesses (see Page 5 of the Instructions for Form 1099-MISC)

Box 4. Federal Income Tax Withheld

Enter backup withholding in this box. If you withheld any federal tax from a non-employee payment, you are required to file a Form 1099-MISC, even if the payment amount is less than the threshold.

Box 5. Fishing Boat Proceeds

Enter the individual’s share of all proceeds from the sale of a fishing catch. Also, report cash payments of up to $100 per trip that are contingent on a minimum catch and paid for other duties performed such as mate, engineer, or cook. Do not report any wages that belong on Form W-2.

Box 6. Medical & Health Care Payments

Report payments of $600 or more made in the course of business to physicians, dentists, and other providers of medical or healthcare services. 1099-MISC forms with payments of this nature aren’t only sent to individuals and partnerships but also corporations and LLCs.

This box also includes payments from medical and health care insurers issued to health care providers. You are not required to include payments to pharmacies for prescription drugs.

Box 7. Payer Made Direct Sales of $5,000 or More

Place a tick mark in box 9 if your business sold $5,000 or more of consumer products to an individual or partnership for resale in a non-retail environment. Typically, this is for Amway distributors and similar direct sales networks.

Box 8. Substitute Payments in Lieu of Dividends or Interest

Report payments of $10 or more that are substitute payments in lieu of dividends or tax-exempt interest. Stockbrokers and financial institutions report substitute payments when dividends or tax-exempt interest is received on a security while those securities are on loan.

Box 9. Crop Insurance Proceeds

Insurance companies use Box 10 to report crop insurance proceeds of $600 or more paid to farmers. However, this amount does not need to be reported if farmers informed the insurance company that expenses have been capitalized for tax purposes.

Box 10. Gross Proceeds Paid to an Attorney

Report payments of $600 or more made to an attorney or lawyer. These are reportable even if the amount is paid to a law firm organized as a corporation and even if the services were performed on someone else’s behalf.

Boxes 11. Blank Fields

No information is required in this box, so leave it blank.

Boxes 12. Section 409A Deferrals

In general, businesses do not have to complete Box 12a. Section 409A refers to certain types of non-qualified deferred compensation plans. For more details, please refer to Page 7 of the 2020 Instructions for Form 1099-MISC.

Box 13. Excess Golden Parachute Payments

Enter any excess golden parachute payments in this box. In general, an excess parachute payment is any amount that exceeds the average compensation for services in the individual’s gross income over the most recent five years. For more details, refer to Page 7 of the 2020 Instructions for Form 1099-MISC.

Box 14. Non-Qualified Deferred Compensation

Report amounts deferred as part of a non-qualified deferred compensation plan that are includible in the taxable income of a non-employee. Do not use this for deferred compensation for employees: That goes on Form W-2 instead. See Page 7 of the IRS’s Instructions for Form 1099-MISC for more details.

Boxes 15-17. State Information

These boxes need to be completed for those businesses who are required to file copies of Form 1099-MISC with state tax departments.

Form 1099 Frequently Asked Questions (FAQs)

We have discussed the general rules for Form 1099-NEC and 1099-MISC. Much more can be said about IRS Form 1099.

Questions that small business owners often ask about Form 1099 include:

Can I Print Out & File Form 1099 From the IRS Website?

You can use the download version of Form 1099-MISC to fill in and print out Copies 1, 2, B and C, which are for your business and your contractors. Copy A for the IRS, however, must be ordered from the IRS, and cannot be printed using the online PDF.

The 1099 form downloads for tax years 2019 and 2020 are available now:

• Form 2019-MISC 2019 Download
• Form 2020-NEC 2020 Download
• Form 2020-MISC 2020 Download

What Is the Penalty for Not Sending a Form 1099?

The penalty depends on when you file the Form 1099 with the IRS. The penalty is $50 per form if you file Form 1099 filed within 30 days of the deadline. The penalty goes up to $100 if filed by Aug. 1, or $270 if filed after Aug. 1 or not filed at all.

Bottom Line

Businesses may need to file Form 1099 to report various types of payments. They are required to send copies of Form 1099-MISC to the IRS and contractors if the business paid $10 or more in royalties or $600 or more in compensation to non-employees. Form 1099-MISC is due by Jan. 31 to report payments made the previous calendar year.

If you need help preparing and sending 1099 forms to your independent contractors, consider using payroll software. For just $6 monthly per contractor, you can automate payments and tax form preparation (both W-9 and 1099 forms). And during those months you don’t need to pay your contractor, you won’t owe Gusto either. Sign up for a free trial today.

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