How can you make sure your business is fully compliant with all the 1099 rules?

In this article, I’ll go through:

  • Who is required to receive a 1099?
  • Who is exempt from a 1099?
  • What is the 1099 used for?
  • Why do businesses need to file a 1099?
  • What are the penalties for not filing a 1099?

See the video version of this article:

Why do businesses issue a 1099?

A business must issue a 1099 because the IRS wants to make sure that people in the US report their income and people do not avoid paying taxes.

As of the time of writing this article, you must file Form 1099-MISC for each person to whom you have paid during the year:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
  • At least $600 in:
    • Rents.
    • Prizes and awards.
    • Other income payments.
    • Medical and health care payments.
    • Crop insurance proceeds.
    • Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
    • Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
    • Payments to an attorney.
    • Any fishing boat proceeds.

In addition, you must use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Who is required to receive a 1099?

A business would issue a 1099 to:

  • Individuals
  • LLC’s
  • Attorney’s / Law firms

Who is not required to receive a 1099?

A business would not need to issue a 1099 to:

  • Another corporation for services or rent (unless it’s a law firm)
  • If you pay someone via credit card (the credit card company would need to issue the 1099)
  • Expense reimbursement
  • Payments for merchandise 
  • Payments for shipping services
  • Payments to foreigners (as long as they provide the services for you overseas)

When do you need to file a 1099?

A business needs to file a 1099 by January 31st of the following year.

For example, if someone works for you in 2021, you would need to make sure you file the 1099 by January 31st 2022.

A best practice I recommend is to make sure you get the person you’re paying to properly fill in a W9 before making any payments to any of these qualified people.

It’s much harder to get a properly filled in W9 after you send payment.

What are the penalties for a business not filing a 1099?

The penalties for a business not filing a 1099 are up to $500 per 1099 in a year.

So it’s very important you file 1099’s for any qualified people.

If you need help with filing 1099’s, we can do everything for you. We provide an all-inclusive accounting solution to make sure business stays compliant and pays the least amount of tax possible. 

To learn more about working with us click here to schedule an appointment.
See also: How to save $10K, $20K, $50K or more in taxes each year by making ONE simple change to your finances.