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s your business generates income, you will have to document and pay taxes on that income. This usually comes alongside a labyrinth of various tax forms you must navigate, often more heavily burdening smaller businesses, freelancers, and independent contractors. Businesses like yours can save time and energy by learning how to issue a 1099 form.

1099 forms are one of the more common tax forms that businesses have to deal with. Broadly speaking, 1099 forms are issued for income from an individual, business, or legal entity where you are not employed. Small businesses usually issue 1099 forms for independent contractors and anyone else who provides a service without being an employee of the company.

Currently, there are several types of 1099 forms, each with a specific purpose. The two most common forms that small businesses must navigate are:

  • The 1099-NEC: This form has been the standard form issued to independent contractors and other people who worked for your business but weren’t employees.
  • The 1099-MISC: This form covers miscellaneous incomes that don’t fit with other 1099 form requirements. In the past, the 1099-MISC has also been issued to independent contractors, though businesses today generally use it for income from prizes, awards, and other miscellaneous income sources.

There are a few other 1099 forms that are often used by small businesses, including:

  • The 1099-K: Issued for payments exceeding $20,000, made via credit cards or third-party payment apps (i.e., PayPal).
  • The 1099-DIV: Issued for income generated from dividends.
  • The 1099-INT: Issued for interest earned from a bank account exceeding $10.
  • The 1099-B: Issued for income from securities as well as bartering that you did on a bartering exchange.

Determining the need for issuing 1099 forms

The first step in easing your tax form burden is knowing when to issue a 1099 form. This helps you plan your business’s tax returns ahead of time and gives you a better picture of what kind of 1099 form you need to use for different situations.

In general, you issue 1099 forms to people you have paid but who are not your full-time employees. You will also need a 1099 form for specific sources of income outside your regular business revenue stream. These cover:

  • Payments made to independent contractors or freelancers.
  • Rental income, royalty payments, and other miscellaneous income.
  • Prizes, awards, and certain other types of payments.
  • Income from the sale of a security.
  • Bank interest or dividends.
  • Resettled credit card debt for less than you originally owed.
  • Revenue from the acquisition of a company that you hold shares in.

Gathering the necessary information

Once you have identified which 1099 form(s) you need to use, the next step is to gather all of the necessary information. Businesses should keep clear, well-organized records on all of the non-employee payments they made throughout the year, as well as any source of income that would fall under a 1099 form.

Make sure you collect the required information from all recipients of your 1099 forms, including their names, addresses, and taxpayer identification numbers (TIN). Even outside of tax season, you should ensure accurate record-keeping of all payments made throughout the year.

Understanding the different types of 1099 forms

There are currently several types of 1099 forms for issuance. While not all of these forms will be relevant to your business, understanding each form's purpose can help you better organize your tax returns.

The main types of 1099 forms (as of 2023) are:

  • 1099-MISC: Miscellaneous Income.
  • 1099-NEC: Nonemployee Compensation.
  • 1099-INT: Interest Income.
  • 1099-DIV: Dividends and Distributions.
  • 1099-R: Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans.
  • 1099-A: Canceled mortgages and home sales.
  • 1099-B: Income from security sales and bartering.
  • 1099-C: Resettled credit card debt.
  • 1099-CAP: Income from shares in other corporations.
  • 1099-G: Income from local, state, or federal governments (including tax refunds)
  • 1099-K: Payments of at least $20,000 via a third-party payment app.
  • 1099-LTC: Long-term care insurance.
  • 1099-OID: Maturation of bonds, notes, or other financial instruments.
  • 1099-PATR: Patronage dividends from a co-op.
  • 1099-Q: 529 account savings.
  • 1099-R: Distributions from pensions, IRAs, or retirement plans.
  • 1099-S: Homes sales and real estate furnish exchanges.
  • 1099-SA: Health savings accounts.

Completing and filing the 1099 forms

The first step to completing your 1099 forms is choosing between paper and electronic filing methods. Today, electronic filing is often more convenient in terms of both the filling process and your record keeping. However, e-filing may incur additional costs from your financial software provider.

Once you have chosen your preferred filing method, the next step is to fill out all relevant information in the specified fields. In most cases, you must input your name, address, phone number, and TIN. Next, you must enter the recipient’s relevant contact information and TIN. If you have a relevant account number, you will enter it as well. Finally, you will provide the amount you paid to the recipient in the tax year.

Upon inputting all relevant information, the final step is to send it out. You should always send one copy to the IRS, one to the recipient, one to your state’s tax department (if applicable), and one to your records.

You must send 1099 forms to their recipients by February 1 of each tax year. The deadline for filing a 1099 form with the IRS is March 1 for paper forms or March 31 for electronic forms.

Retaining records and documentation

Once you have issued all copies of your 1099 forms to relevant parties, it is important to maintain accurate records and copies of all forms that you have filed. Good business practices hold that any business owner should maintain comprehensive records of 1099 forms for a period of three to five years.

Currently, the IRS recommends keeping 1099 forms on file for at least three years from the original return date (employment tax records should be kept for at least four years). However, the recommended time frame varies depending on the circumstances. For example, the IRS recommends keeping losses from securities or bad debt reduction for at least seven years.

Penalties and compliance considerations

Failure to comply with mandated 1099 issuance protocols can result in monetary fines and further legal trouble. The exact fine you will face is proportional to how long you are out of compliance with issuance requirements. Here are examples of fines you may incur:

  • For 2023 tax returns, 1099 forms that are up to 30 days late can incur a fine of $50. Note that, beginning in 2024, this fine increases to $60.
  • 1099 forms that are not filed between 31 days after the deadline to August 31 of that tax year will incur a fine of $110 ($120 beginning in 2024).
  • Further delays or overall failure to file 1099 forms will result in a fine of $290 in 2023 and $310 starting in 2024.
  • Intentionally disregarding 1099 forms altogether will result in a fine of $580 in 2023 and $630 beginning in 2024.

You may also be subject to backup withholding of a flat rate of 24% in certain circumstances. This includes failure to provide an accurate TIN, failure to report interest or dividends on your 1099 forms accurately, and failure to certify that you are not subject to backup withholding for unreported interest and dividends.

Utilizing tax software and professional assistance

Businesses can also take advantage of tax software or online platforms to facilitate the filing and issuance of 1099 forms more efficiently. Financial technology providers like Novo have convenient, effective integrations to help your business organize all of your relevant tax data across multiple platforms. Thanks to these digital integration capabilities, you can streamline your business's accounting and easily sort your 1099 forms by type, client, and issuance date.

Professional tax advisors and accountants are another excellent resource for small businesses that need assistance with the complexities of their 1099 filing requirements.

Additional reporting requirements

All IRS deadlines and requirements for 1099 issuance relate to federal income tax requirements. However, many state and local governments have their own laws relating to 1099 forms, including separate deadlines, filing thresholds, and relevant sources of income. For example, states like California, Massachusetts, and New Jersey have the same filing deadline for 1099 forms as the IRS.

However, states like Minnesota, Louisiana, and Kentucky have separate deadlines on January 31. Before issuing your 1099 forms, always research specific state and local laws based on the location of your business. Investing in quality tax software can also help you navigate federal and state requirements; the best tax software programs can automate state filing requirements for 1099 forms based on your location.

Stay one step ahead of the tax paperwork

Any business can get overwhelmed by tax documents, payment apps, spreadsheets, and all the other hassles that come with tax season. If your business is found to have missed deadlines or is otherwise noncompliant with tax regulations, you may face consequences such as:

  • Additional penalties on top of the taxes you owe
  • Costly audits
  • Additional legal fees
  • Potential criminal charges

Using a leading business banking platform can go a long way to easing your business's hassle come tax season. Novo is an all-in-one financial platform dedicated to helping small businesses manage their finances. By offering small businesses a top-notch business checking account and robust software integration, Novo can help take the burden out of tax season. Best of all, there are no monthly fees. Sign up for a Novo account today.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

Novo is a fintech, not a bank. Deposit account services provided by Middlesex Federal Savings, F. A.; Member FDIC.

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