Tax season can be a stressful time for both individuals and businesses. One of the critical forms you may encounter is the IRS 1099 form.
Payments made to nonemployees don’t show up on a W2. Instead, the IRS requires payers to report payments (over $600) on a tax form known as a 1099.
Ahead, you’ll learn the various types of 1099 forms, who needs to file them, and how to file them properly.
Table of Contents
- hat is a 1099 form?
- What is the purpose of the 1099 form?
- Who needs to file a 1099 form?
- How to file a 1099 form
- Types of 1099 forms
What is a 1099 form?
IRS form 1099 is a tax form that businesses, financial institutions, and other entities use to report payments to nonemployees. Nonemployees include independent contractors, freelancers, and other self-employed individuals that are not considered employees of a business.
Since 1099s don’t include Federal Insurance Contributions Act (FICA) tax withholdings, self-employed individuals pay their version, called a self-employment tax. The 15.3% tax rate is the employer and employee shares of taxes.
Like W2s, 1099 forms are considered information returns, which means they contain information about a taxpayer but do not detail tax liabilities.
What is the purpose of the 1099 form?
The IRS uses the 1099 to track nonemployee income, and taxpayers use it to correctly prepare and file income tax returns.
1099s can help taxpayers and federal, local, and state tax departments ensure the accuracy of taxable income reported on tax returns. For example, they can help self-employed individuals track total income earned through various freelance or contract positions in a given tax year.
Who needs to file a 1099 form?
Any business that pays a freelancer, independent contractor, sole proprietor, or member of a partnership or LLC more than $600 in a tax year is required to file a 1099 form.
The $600 threshold applies to payments such as rental income, prizes and awards, medical and health care payments, and payments made from a special type of arrangement known as a notional principal contract.
Financial institutions, lenders, and federal and state tax authorities must also provide these tax forms to individuals who have received payments such as royalties or brokerage payments of $10 or more during a given tax year.
Learn: Small Business Tax Deductions: 22 Money Saving Tips
How to file a 1099 form
Step 1: Get the right forms
Acquire the appropriate 1099 form from the Internal Revenue Service (IRS) website. There are several types of 1099 forms depending on the nature of the income. You can look up more information about each form at IRS.gov, or read through the list below.
For each recipient, you will need to fill out three copies of the form: one for the recipient, one for the IRS, and one for your own records.
Step 2: Request a Form W-9 from the recipient
Before you can complete the 1099 form, ask the recipient to provide you with a completed Form W-9, which includes their name, address, and taxpayer identification number (TIN). The TIN can be a Social Security number (SSN) or an employer identification number (EIN) for businesses.
Step 3: Complete the 1099 form
Fill in the 1099 form with the following information:
- Payer’s name, address, and TIN: Enter your personal or business information.
- Recipient’s name, address, and TIN: Use the details provided on Form W-9.
- Account number: If you are filing multiple 1099 forms, assign a unique account number to each recipient to differentiate between them.
- Income: Report the total amount paid to the recipient during the tax year in the appropriate box based on the type of income.
Review the form for accuracy and ensure all fields are completed correctly.
Step 4: Distribute copies of the 1099 form
By January 31 of the year following the tax year in question, provide Copy B of the 1099 form to the recipient. This allows the recipient to report the income on their tax return.
Step 5: File with the IRS
Submit Copy A of the 1099 form to the IRS by February 28 if tax filing by paper, or by March 31 if filing electronically. If you have 250 or more 1099 forms to file, you are required to file electronically. To do so, register for the IRS’s Filing Information Returns Electronically (FIRE) system.
Step 6: Retain records
Keep Copy C of the 1099 form for your records for at least three years from the due date of the related tax return.
Step 7: File Form 1096 (if applicable)
If you are submitting paper 1099 forms to the IRS, you must also file a Form 1096, which serves as a summary of the 1099 forms you are submitting. Include your contact information, the total number of forms, and the total amount reported. Mail Form 1096 along with Copy A of the 1099 forms to the appropriate IRS service center.
E-filing options are available through the IRS website, and many small businesses hire a tax preparation expert to send 1099 tax forms versus using a tax software like Turbotax.
Types of 1099 forms
There are multiple types of 1099 forms, each of which is used to record a different type of income or payment. Here’s an overview of some of the most common 1099 forms.
Form 1099-A records income from real estate transactions that result in debt cancellation. If you sell your house in a short sale (in other words, for an amount less than the sum of your outstanding mortgage debt) and this results in your mortgage lender forgiving some of your mortgage, your debt reduction is considered taxable income and reported on Form 1099-A.
Form 1099-B records capital gains or losses. They are typically issued for brokerage accounts.
This form also records value gained through a barter exchange transaction, a transaction type in which individuals or entities agree to exchange goods or services without accepting monetary payment.
Form 1099-C reports income in the form of credit card or other cancellation of debt or forgiveness. If, for example, your credit card company forgives $10,000 of credit card debt, that $10,000 is considered taxable income and must be reported on an income tax return.
If your debt forgiveness involves a real estate transaction (such as foreclosure on a home), you might receive both forms 1099-A and 1099-C. The lender will issue Form 1099-A when you abandon the property, and your financial institution will issue Form 1099-C when it forgives the debt.
1099-DIVs report distributions in the form of dividend earnings, which are funds paid to a company’s shareholders out of its profits. Dividend earnings are a type of investment income.
Form 1099-G reports distributions received from local, state, or federal governments. This can include unemployment payments or tax refunds, credits, or refund offsets.
Form 1099-INT reports interest income from a bank account, brokerage account, or other financial institution.
Form 1099-K is sent to freelancers, independent contractors, or any unincorporated business entity paid more than $600 from another business annually via credit card or an electronic payment app like Venmo or Zelle.
Form 1099-LTC records benefits paid out by long-term care insurance contracts or accelerated death benefits from a life insurance contract.
Form 1099-MISC is used to report miscellaneous income such as rent, prizes and awards, and royalty income. Any individual who received payments of more than $600 in a tax year can expect a 1099-MISC.
Form 1099-NEC is one of the most common types of 1099s. 1099-NECs are for non-employee income: any business that pays an independent contractor, sole proprietor, or member of a partnership or LLC more than $600 dollars in a tax year by either direct deposit or cash payment is required to send the payee a 1099-NEC.
Form 1099-OID records discounts, or when the security drops below face value, on bonds or notes. These discounts are considered taxable income. You’ll receive a 1099-OID from the original issuer of your discounted bond.
Some cooperatives pay members patronage dividends. Any dividends in excess of $10 annually are recorded on Form 1099-PATR.
Form 1099-Q records money that you receive from a 529 plan, which is an education savings account. These funds are only considered taxable income if they are used for purposes other than qualified education expenses.
Form 1099-R reports distributions from a retirement plan, such as a retirement pension, annuity, IRA, profit-sharing program, or other retirement account.
Form 1099-S reports proceeds from the sale of a home or other real estate property. Whether are not these proceeds are considered taxable income depends on a number of variables, so consult the IRS website or a tax professional for details on your specific situation.
Form 1099-SA records distributions on a health savings account (HSA) or different types of medical savings accounts (MSAs), including Medicare Advantage MSAs. These distributions are not considered taxable income if they are used for qualified health expenses.
Form SSA-1099 is also known as a Social Security Benefit Statement. This shows the total benefits you received from the Social Security Administration in the previous year.
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1099 form FAQ
What is a 1099 form used for?
The IRS uses the 1099 to track nonemployee compensation; it’s used by taxpayers to properly file federal income tax returns.
Who needs to fill out a 1099 form?
Businesses or other entities must fill out 1099s and provide them to freelancers, independent contractors, sole proprietors, or members of a partnership or LLC who have earned more than $600 in nonemployee income during a given tax year.
Financial institutions, lenders, and federal and state tax authorities must also provide these tax forms to individuals who have received payments during a given tax year, including royalties or brokerage payments of at least $10.
What is the difference between a form W-2 and a 1099 form?
A Form W-2 is issued by employers to report an employee’s annual wages and the taxes withheld from their paychecks. A 1099 form is issued by businesses or individuals to report various types of non-wage income, such as payments to independent contractors, freelancers, or vendors.
What is a W-4 vs. a 1099?
A Form W-4 is used by employees to indicate their tax withholding allowances, helping employers determine the correct amount of federal income tax to withhold from their paychecks. A 1099 form, as mentioned earlier, is used to report non-wage income for independent contractors and other recipients of miscellaneous income.