What Is a 1099 and Why Should I Care?

There are many types of Forms 1099, but each one inevitably serves the same purpose; and they are important to understand for payors, including financial institutions and small businesses alike.

There are many types of Forms 1099, but each one inevitably serves the same purpose; and they are important to understand for payors, including financial institutions and small businesses alike. Forms 1099 forms are issued to payees to provide them with information regarding certain payments made to them throughout the year. This reporting differs from the employment income that is reported on a Form W-2.  The payor of reportable payments is also required to provide Forms 1099 to the Internal Revenue Service (IRS).  The payments reported on these forms are compared to the recipient’s tax return to ensure that all income was properly reported. Therefore, it is crucial for these taxpayers to report all of their additional income to the IRS in order to avoid a potential audit. Taking everything into consideration, income reportable on Forms 1099 may include interest, dividends, rents, or compensation for certain freelance work. Because non-employee services income is reportable, financial institutions and small businesses that hire independent contractors are required to provide Forms 1099 to report those payments. As indicated, payors required to issue Forms 1099 must provide one copy to the IRS and another copy to the taxpayer (or the recipient of these payments). Depending on the type of reportable payment and number of forms filed, Forms 1099 may be sent to the IRS via mail or may be required to be sent electronically.

Who Has to File a 1099?

Persons engaged in a trade or business that makes reportable payments are required to issue Forms 1099. This includes financial institutions, large and small businesses, and even tax-exempt organizations. It is important to understand the types of income that are reportable and the various types of Forms 1099 because the forms can have varying due dates.  Significant to this, the IRS recently changed the due date for forms reporting services income paid to independent contractors, with both the IRS and recipient copy now due on January 31st.

Different types of Forms 1099

While there are many different types of 1099 forms, these are the most common types: 1099-DIV, 1099-INT, 1099-NEC,1099-MISC, and 1099-R. A 1099-DIV is used by a corporation (or its transfer agent) to report dividends paid. A 1099-INT is used by the payor of interest.  This includes a financial institution as well as any other person engaged in a trade or business that makes interest payments during the calendar year. A 1099-MISC is used to report rents, royalties, fees, and other types of non-service income New Form 1099-NEC is used to report services income paid to independent contractors. Lastly, a 1099-R (referred to as Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) is used to report distributions from an IRA or another type of retirement fund.

Why should you care about a 1099?

Persons engaged in a trade or business that makes reportable payments during the calendar year must report those payments on the appropriate Form 1099.  Because this information is a valuable compliance tool for the IRS, the regulations impose penalties for failure to comply.  These penalties can range from $560 per individual failure to 10% of the gross amount not reported if the IRS finds the failure to be intentional disregard.  A backup liability of 24% of the reportable payment is also imposed if the payor did not get the payee’s taxpayer identification number in the manner required.

If you’ve been looking to make tax season easier with clean books and the right accounting partners, talk to our team at Decimal to learn more!