Filing 1099 Forms
Between complex rules and changes in filing requirements over the years, there is a lot of confusion around 1099s. This article covers, who is required to file 1099s, to whom they need to be issued, when they are due, and a few related resources to help you with how to file them.
Who Needs to Issue 1099s
If you have a small business, are self-employed, or own a rental property treated as a business, then you are required to issue 1099s. This includes sole proprietors, corporations, partnership, LLCs, nonprofits, and individual rental property owners. Individuals making personal payments are not required to issue 1099s.
Rental Property Owners
The requirement for rental property owners is new – it started in 2018 with the creation of the Qualified Business Income Deduction (QBID). The QBID allows taxpayers to deduct 20% of qualified business income from their taxes, thus reducing the amount of taxable income and income tax to pay.
The QBID applies to sole proprietorships, s-corporations, partnerships, and sometimes rental properties. Rental properties qualify for this deduction if they qualify as a business. The IRS has not provided definitive, black & white guidance as to when a rental property qualifies as a business (as of the date of publishing this article). So, it has been left to taxpayers and their tax advisors to make this judgment.
At Thrive Business Group, we use a few simple tests to determine if a rental property qualifies as a business for the purposes of the QBID and therefore the requirement to issue 1099s.
- In owning the rental property, is your intention to make a profit?
- Do you (or an agent such as a property manager) engage in regular and considerable activity on the rental property?
If you can answer yes to both of the above, then most likely your rental property qualifies as a business in this context and you are required to file 1099s. If you are still not sure, err on the side of caution and issue 1099s. If you claim the QBID on your rental income, then you are required to file 1099s.
To Whom 1099s are issued
1099s are issued to any business or individual that your business or rental property has paid $600 or more for any kind of service or rent.
Many small business owners believe that 1099s are only issued to subcontractors, however this requirement is much broader, extending to all service provider payments and rent payments (including real estate/property rent, machinery rent, and pasture rent).
There are some additional special payment types that are required to be reported on 1099s, however they are uncommon and quite specialized and therefore not addressed here.
Exceptions
There are a few exceptions to be aware of. Although this is not a comprehensive list of exceptions and special cases, it covers the most common scenarios in small business.
- If the business you have paid is taxed as a corporation, you are not required to issue a 1099 (unless they are an attorney or law firm, then they still need a 1099). See the discussion below about how to know if a business is taxed as a corporation or not, especially for payments to LLCs.
- If the organization you have paid is a tax-exempt nonprofit, you are not required to issue a 1099.
- If you have paid using a credit card, Paypal, Venmo, Square, Stripe, or similar electronic processing service, you are not required to issue a 1099.
- If you paid rent to a realtor or property manager, you are not required to issue a 1099.
When to file 1099s
Beginning 1/1/2020, there are two 1099 forms commonly used in small business, with two different filing due dates.
Form 1099-NEC is due by 1/31. This form is used for all service provider payments, except attorneys.
Form 1099-MISC is due by 2/28 when filed on paper or 3/31 when filed electronically. This form is used for all rent payments and payments to attorneys.
How to file 1099s
The first step is to gather the information you need for preparing the 1099s. You will need to have a Form W-9 completed by the business or individual you will be sending the 1099 to. This is how you obtain their legal name, address, and tax ID number. This is also how you find out if an LLC is taxed as a corporation (and therefore exempt from the 1099 requirement) – they are required to indicate their tax classification on the form.
A best practice is to obtain a W-9 form from each applicable payee at the time you issue your very first payment to them during the year. Don’t wait until December or January to request this information. It will leave you scrambling when you have a tight deadline. We also recommend that you review your records in November to double check that you have all W-9 forms you need and obtain any missing forms.
I recommend using an online filing service for preparing and filing 1099 forms. The IRS makes pdf forms available online for download, but they are not compliant for printing and mailing to the IRS. You can also request compliant forms to be mailed to you from the IRS, but this can take several weeks (or months) to arrive. Purchasing compliant forms from an office supply store can be costly.
Using the QuickBooks 1099 service only yields accurate results when set up correctly and all applicable payments are recorded correctly, which is rare (it’s very easy to have just one payment recorded slightly differently to yield an incorrect 1099). Their service also tends to cost a bit more than other options.
Online filing services solve all of these issues and are very inexpensive, generally charging less than $5 per 1099 form. An online service will use the data you enter to mail (or email) the 1099 to the recipient and file the government copies electronically with the IRS.
There are many online filing services available – a few are listed below. Thrive Business Group has no affiliation with any particular service and makes no specific recommendations or assurances as to their service.
Putting It All Together
As you can see, 1099 compliance is a bit more complex than just issuing 1099s for subcontractors. However, it doesn’t have to be a burden. With proper understanding of the 1099 filing requirements, being proactive in obtaining W-9 forms throughout the year, and using an online filing service, it can be relatively quick and inexpensive to file all required 1099 forms.
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