Key Takeaways:

  • You must issue a 1099-NEC to any non-employee you pay $600 or more for services during the tax year.
  • 1099 forms are not required for payments to corporations, except for legal fees and medical services.
  • Payments made via credit cards or third-party networks are reported on Form 1099-K, not 1099-NEC.
  • There are more than a dozen types of 1099 forms; choosing the right one depends on the nature of the payment.
  • Deadlines are critical: Forms must generally be sent to recipients by January 31 and filed with the IRS by January 31 (if reporting nonemployee compensation).

When to Issue a 1099

A 1099 form is used to document wages paid to a freelance worker or independent contractor. While many business owners aren't sure when to issue a 1099 form to an independent contractor, doing so is an important part of tax compliance. Here's what you need to know about this important documentation for freelance workers.

1099 Rules for Business Owners in January 2017

Because there have been several updates and changes to 1099-MISC forms in recent years, many business owners are confused about these regulations. In general, you have to issue a 1099-MISC tax form whenever:

  • You pay an individual at least $600 over the course of a year, provided this payment or payments was for a prize, rent, or service (including materials or parts).
  • A lawsuit settlement that you have paid out also requires you to issue a 1099-MISC.
  • This form is not required for personal payments, only for business payments.

Penalties for not providing a required 1099-MISC form range from $30 to $100 depending on when you finally issue the form. The cap on this penalty is $1.5 million annually per business. In addition, businesses who refuse this requirement are charged a minimum fee of $250 per form.

Who Requires a Form 1099?

This form needs to be sent to subcontractors and vendors to whom you paid more than $600 in a calendar year, including all estates, individuals, limited partnerships, or limited liability companies?

Types of 1099 Forms and What They Cover

There are several variations of Form 1099, each designed to report a specific type of income. While 1099-NEC is most relevant for independent contractors, others apply to different situations:

  • 1099-NEC: Used for non-employee compensation of $600 or more.
  • 1099-MISC: Reports miscellaneous income like rent, prizes, and legal settlements.
  • 1099-INT: Issued by banks and financial institutions for interest income.
  • 1099-DIV: For dividends and other distributions from investments.
  • 1099-B: Reports gains and losses from securities transactions.
  • 1099-S: Related to proceeds from real estate transactions.
  • 1099-G: For certain government payments, like unemployment benefits or tax refunds.
  • 1099-K: Reports payments processed by third-party networks like PayPal or Square if they exceed $600 (as of 2024).
  • 1099-R: Covers distributions from retirement plans or annuities.

Understanding which form to use is essential for accurate tax filing. Businesses often need to issue multiple types depending on their activities throughout the year.

Who Is Considered a Subcontractor or Vendor?

Any non-employee who you paid for a service.

Are There Exceptions?

Yes; vendors who operate as C- or S-Corporations do not require a 1099. You do not need to send this form to vendors of storage, freight, merchandise, or related items or when rent is paid to a real estate agent. Payments made by PayPal or another third-party network, gift card, debit card, or credit card also don't require a 1099. That's because the card issuer or network is reporting these payments using Form 1099-K.

There are also special rules for lawyers; you need to send your lawyer a 1099 for payments of more than $600 even if she is incorporated.

A smart strategy for business owners is to ask for a W-9 up front for any vendor to whom you will pay more than $600 in a year. This form provides you with their tax ID number and mailing address, as well as whether they are a corporation.

It's important to note that you must pick up 1099 forms from the post office or an IRS service center. They cannot be downloaded from the IRS website. All 1099s need to be submitted along with a 1096 form within one month.

Common Misunderstandings About Who Needs a 1099

Many business owners struggle with determining who needs a 1099. A few common misunderstandings include:

  • "I don’t need to issue a 1099 to an LLC."
    Not always true—if the LLC is taxed as a sole proprietorship or partnership, it still needs a 1099 unless it’s taxed as a C or S corp.
  • "All payments must be reported."
    Only payments of $600 or more for services to non-corporate entities require a 1099.
  • "I can skip issuing 1099s if I paid by PayPal or credit card."
    Correct! These payments are reported by the processor on Form 1099-K, so businesses don’t need to duplicate the report.

Understanding these exceptions helps avoid over-reporting or misreporting to the IRS.

Deadline to Payees

Taxpayers must mail Form 1099 to vendors by Jan. 31. The transmittal form is due to the IRS by Feb. 28. If you have an accountant, he or she can submit these forms electronically by March 31.

Deadline to IRS

Jan. 31 is a new deadline, so don't get it confused with the previous end-of-February deadline. Also, check with your state to determine whether you need to file a 1099-MISC form. If you miss the deadline, talk with your accountant.

IRS E-Filing Thresholds and Compliance Tips

If your business files 10 or more information returns (including 1099s, W-2s, etc.), you are required to e-file, unless granted a waiver. This threshold was reduced from 250 to 10 as of tax year 2023.

Tips for staying compliant:

  • Invest in tax filing software to simplify bulk filing.
  • Keep detailed payment records throughout the year.
  • Collect W-9s before issuing payment to vendors.
  • Check for updated IRS thresholds and state requirements annually.

Failing to file electronically when required can result in additional penalties.

Rules for Foreign Workers

A 1099 is required for any worker who is not a U.S. citizen. It is the onus of the business owner to determine whether a contractor or vendor is a citizen. You can ask them to fill out Form W-8BEN for this purpose.

Procedures for 2017

Getting a Form W-9 from all vendors in advance keeps you from having to track down their EIN and/or mailing address at tax time. Not filing the forms on time could result in major penalties. If you're running late, check with accountants, many of whom perform this service in January quickly and at an affordable rate.

What's an Independent Contractor?

Temporary workers that provide services or goods to a company based on contracted terms are considered independent contractors. An independent contractor might also be called a temporary worker or 1099 employee. They can be corporations, companies, or individuals. Independent contractors are usually compensated per project. As an employer, you are not responsible for their tax withholdings, which can often make it cheaper to use a freelance contractor than it is to hire a full-time, permanent employee. Correctly classifying your workers and submitting the right forms allows you to avoid steep fees and penalties from the IRS.

How the IRS Distinguishes Contractors from Employees

Determining whether a worker is an independent contractor or an employee impacts your 1099 obligations. The IRS uses three categories to assess the working relationship:

  1. Behavioral Control: Does the business control how the work is done?
  2. Financial Control: Are business aspects (expenses, tools, reimbursements) controlled by the employer?
  3. Type of Relationship: Are there written contracts or benefits like vacation or insurance?

If a worker is classified incorrectly, the business could face back taxes and penalties. When in doubt, file Form SS-8 with the IRS or consult a legal expert. You can also find an experienced attorney through UpCounsel to review your classification practices.

So How Do I Prepare the 1099 Forms?

To correctly prepare your Form 1099s based on IRS rules, use these seven easy steps.

1. Check Work

Confirm that you have the correct information for each contractor or vendor. Complete the W-9 form for each. Consider talking to each contractor to ensure no information has changed since they filled out the W-9. If they have not filled out a W-9 or if the information is missing, you are allowed to withhold 28 percent of their pay and send it to the IRS.

2. Gather 1099s

You have to use specific forms picked up from the post office or IRS center; downloaded and printed versions are not allowed. You can also create your own 1099 forms using a software program such as QuickBooks, or order forms from your local office supply store.

3. Complete Forms

You'll need to write in your federal tax ID number, the contractor's SSN or EIN, and the amount of money you paid the contractor or vendor this year. If you withheld any state or federal income tax from these payments, fill in either box 4 or 11. Then complete the contact information forms. This must be done for every contractor you paid more than $600. That's why it makes sense to use financial software that can create these forms; you'll save time and lower the risk of error.

4. Submit the Forms to Each Contractor

Do so no later than Feb. 1 to avoid IRS penalties.

5. Send the IRS Form 1096

This form summarizes the totals from all your 1099 forms. Paper copies must be mailed no later than Feb. 29 or online forms submitted no later than March 31.

6. Document Your Filing

Save Copy C for your records.

When Not to File a 1099

You do not need to issue a 1099 form if:

  • The recipient is a corporation, except in the case of attorneys or medical/health care payments.
  • Payments were made via third-party networks (like Venmo, PayPal, or Stripe), which are reported on 1099-K.
  • The payment was for personal services (e.g., babysitting, tutoring for personal use).
  • Payments total less than $600 for the calendar year (unless otherwise specified, such as royalty payments over $10).

Failing to identify exceptions can lead to redundant filings and increased administrative work.

Frequently Asked Questions

Who needs a 1099 form? Any non-employee (individual, sole proprietorship, or partnership) paid $600 or more for services in a year generally needs to receive a 1099-NEC.

What types of 1099 forms exist? Common types include 1099-NEC, 1099-MISC, 1099-INT, 1099-DIV, and 1099-K—each reporting different types of income.

What is the deadline for issuing a 1099? Businesses must send 1099s to recipients by January 31 and file them with the IRS by January 31 (paper or electronic) for nonemployee compensation.

Do I need to send a 1099 to a corporation? Generally, no—except for payments to attorneys or medical providers. Use Form W-9 to confirm entity type.

What if I pay someone using PayPal? If you pay through PayPal or another third-party network, you typically do not need to issue a 1099-NEC. The network will report it on Form 1099-K.

If you need help issuing 1099s, post your legal need to consult the experienced attorneys on UpCounsel's marketplace. We employ only graduates of programs such as Harvard Law and Yale Law who have an average of 14 years of experience representing companies like Google, Menlo Ventures, and Airbnb.