If your business made or received payments to independent contractors and entities (other than compensation to your employees) during the calendar year, it’s likely you must file an information return called a Form 1099 with the IRS. You may also need to send a copy of the form directly to the recipient of the payments. Being aware of and meeting your 1099 reporting obligations is essential to avoid potentially hefty penalties.
Payments Made “in the Course of Trade or Business”
Form 1099 is only required for payments made as part of your trade or business—not payments made, for example, to a landscaper or painter you hired to improve your own home. The catch-all form, Form 1099-MISC for Miscellaneous Income, is one of the most frequently required forms. Some common payment purposes covered by Form 1099-MISC are:
- Services rendered by independent contractors or others (not employees)
- Broker payments
- Attorneys’ fees
- Medical and healthcare payments
There are also other types of 1099s that you may need to file. For example, a Form 1099-DIV should be used if your business is a corporation that has issued stock or paid dividends.
Payments Received “in the Course of Trade or Business”
You may also be required to report payments your business received for specific circumstances. For example, you must use Form 1099-MISC to report direct sales of at least $5000 in consumer products to a buyer for resale anywhere other than a permanent retail establishment. Similarly, the proceeds from most real estate transactions (not primary residences) should be reported using Form 1099-S.
When the 1099 Is Not Required
- Generally, if your business made payments of less than $600 to any one person or unincorporated business, you do not need to file a Form 1099.
- You usually do not need to report payments made to corporations, including LLCs that have elected to be taxed as a corporation. There are some exceptions where a 1099 must be filed even if the payee is a corporation, for example, payments of legal fees and medical and healthcare payments.
- You don’t need to file a Form 1099 for payments made by credit card, debit card or qualified third-party payment networks (like Paypal).
Also note, although Form 1099 is one of the most commonly used, there are other information returns that you may also need to file.
Missed Deadlines Can Be Costly
The penalties for missing the IRS’s deadlines can be steep. Depending on how late a business is in submitting its Form 1099s to payees or filing with the IRS, the fine can range from $50 to $260 per form up to a maximum of $1,072,500 for small businesses. The fine jumps to $530 per form with no maximum if the failure to file or furnish the form is due to intentional disregard. The penalties for failing to file a 1099 and for failing to provide a copy to payees are separate. Also, even if you file a 1099 before the mandated deadline, if it is the incorrect form or contains incorrect information, or if you submit a non-scannable form, you may still have to pay a penalty.