1099 Dos and Donts

The IRS focuses heavily on taxpayer compliance with information reporting laws.

Penalties for compliance failures have steadily increased over the years. Penalties for failure to file correct information returns may apply if you:

  • You don’t file a correct information return by the due date and a reasonable cause is not shown.
  • You file on paper when you were required to file electronically.
  • You fail to report a taxpayer identification number (TIN).
  • You report an incorrect TIN.
  • You fail to file paper forms that are machine readable.

Penalties for failure to furnish correct payee statements may apply if:

  • You don’t provide a correct payee statement by the applicable date and a reasonable cause isn’t shown.
  • All required information isn’t shown on the statement.
  • Incorrect information is included on the statement.

The penalty rates for failure to file correct information returns and/or to furnish correct payee statements depend on how late the correct Form 1099 is filed. A higher per-failure penalty applies for a taxpayer who intentionally disregards the filing requirements for information returns and payee statements.

Filing form 1099

Generally, any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income.

To properly report the information required on Form 1099, you need to have the provider’s taxpayer identification number (TIN). You can request that the provider fill out and give you a Form W-9, Request for Taxpayer Identification Number and Certification, before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to “backup withhold” 24% from any “reportable payments”.

Form 1099-MISC, Miscellaneous Information, and Form 1099-NEC, Nonemployee Compensation, are probably the most filed Forms 1099 of the series. You must file Form 1099-MISC for each person, subject to the exceptions listed below, to whom you paid during the year:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt
  • At least $600 in rents, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, or the cash paid from a notional principal contract to an individual, partnership, or estate.
  • Any fishing boat proceeds.
  • Gross proceeds of $600 or more paid to an attorney.

In addition, either Box 7 on Form 1099-MISC or Box 2 on Form 1099-NEC may be used to report any sales totaling $5,000 or more of consumer products for resale, on a buy-sell, a deposit-commission, or any other basis. Form 1099-MISC must also be filed for each person from whom you may have withheld any federal income tax under the backup withholding rules, regardless of the amount of the payment.

Form 1099-MISC

You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business; personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. For this purpose, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.

Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which you are not required to file a Form 1099-MISC include:

1. Generally, payments to a corporation (including a limited liability corporation (LLC) that is treated as a C or S corporation).

2. Payments for merchandise, telegrams, telephone, freight, storage, and similar items.

3. Payments of rent to real estate agents or property managers.

4. Wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement),

5. Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (these also must be reported on Form W-2).

6. Business travel allowances paid to employees (may be reportable on Form W-2).

7. Cost of current life insurance protection (must be reported on Form W-2 or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.).

8. Payments to a tax-exempt organization, including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government.

9. Payments made to or for homeowners from the HFA Hardest Hit Fund or similar state program (reportable on Form 1098-MA).

10. Compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor’s benefit, or under a state program that provides benefits for surviving dependents of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty.

11. Compensation for wrongful incarceration for any criminal offense for which there was a conviction under federal or state law.

Attorney fee payments made to corporations generally must be reported on Form 1099-MISC.

Form 1099-NEC

In addition, you must file a Form 1099-NEC for each person in the course of your trade or business to whom you paid at least $600 during the year for:

  • Services performed by someone who is not your employee (including parts and materials).
  • Each person from whom you have withheld any federal income tax (report in box 4).
  • Under the backup withholding rules regardless of the amount of the payment.
  • Payments to an attorney (not including gross proceeds).

Similar to the rules for Form 1099-MISC, some payments that may be taxable to the recipient are not required to be reported on Form 1099-NEC, including:

  • Payments to a corporation (including an LLC that is treated as a C or S corporation).
  • Payments of rent to real estate agents or property managers (however, the real estate agent or property manager must use Form 1099-MISC to report the rent paid over to the property owner).
  • Business travel allowances paid to employees and employee business expense reimbursements.
  • Canceled debts (which must be reported on Form 1099-C, Cancellation of Debt).

BPM can help

Unless you specifically engage a firm to prepare your Form 1099s, you are responsible for preparing and filing Forms 1099. If you are audited, the IRS will want documentation of expenses and will look at whether Forms 1099 were filed. Any wage and labor amounts to be deducted on your return will be separately classified and will not be hidden or bundled with other expenses, since there are specific lines on the returns for wages and labor.

There are many other types of information returns that you may be required to file depending on the types of activities in which your business engages in.