What is form 1099 for contractor & How to file it correctly

The Form 1099 is a series of tax forms and documents issued by the Internal Revenue Service (IRS). These set of documents are normally referred to as “information returns.” There are a number of different 1099 forms that report the various types of income which you may receive throughout the year other than the salary your employer pays you. (Note: For Income from salary, wages Form W-2 is to be completed and submitted to IRS department.)

 

Form 1099 is basically used by individuals to report:

  • Payments made to independent contractors,
  • Rental property income,
  • Royalties
  • Income from interest and dividends,
  • Sales proceeds
  • Other miscellaneous income.

 

Note: The latest Form 1099 and the related instructions and guideline to file the same can be downloaded from the IRS website: Here

 

In general, every business owners must issue separate Form 1099-MISC to each of the individuals to whom a payment of an amount exceeding $600 is made as a rental payment or payment for any services (including parts and materials) or amount paid as prizes and awards, or other income payments.

 

Note: There is no requirement to issue Form 1099 if any such above payment is made for personal purposes.

 

What is 1099 for contractor?

Independent contractors are people who are engaged in independent trade, business, or profession and are involved in providing the below services to the general public such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers, etc.

An independent contractor is an individual that you hire, on a contract basis, to complete a particular project or assignment. In common terms, an independent contractor is not an employee.

 

 

Purpose of Form 1099

The general purpose of all these forms cumulative is to provide information to the Internal Revenue Service (IRS) about other types of income which are not related to employment.

The below are few purposes and significance of maintaining and filing Form 1099:

  • Form 1099 proves to be an effective tool and huge helping hand for the IRS to collect taxes.
  • Form 1099 helps every individual to keep track of their respective incomes and report the same accordingly. It also helps to calculate and pay off estimated tax as the case may be.
  • Details submitted under Form 1099 can be used by individuals to file their respective individual returns.

 

Types of Form 1099

The below are a few listed Form 1099 and their usage provided for your reference. These forms are used for filing income details.

  1. Form 1099-A: The said form is used when income arises from acquisition or Abandonment of Secured Property. Link for the form is attached here for you.
  2. Form 1099-B: The said form is used when the income arises from proceeds From Broker and Barter Exchange Transactions. Link for the form is attached here for you.
  3. Form 1099-C: The said form is used when the income arises from the cancellation of Debt. The link for the form is attached here for your reference.
  4. Form 1099-CAP: The said form is used when the income arises from changes in Corporate Control and Capital Structure. The link for the form is attached here for you.
  5. Form 1099-DIV: The said form is used when the income arises from dividends and Distributions. The link of the form is here for you.
  6. Form 1099-G: The said form is used when the income arises from certain Government Payments. The link for the form is attached here for you.
  7. Form 1099-H: The said form is used when the income arises from health Coverage Tax Credit (HCTC) Advance Payments. The link for the form is attached here for you.
  8. Form 1099-INT: The said form is used when the income arises from interest Income. The link for the form is attached here for you.
  9. Form 1099-K: The said form is used when the income arises from Payment Card and Third Party Network Transactions. The link for the form is attached here for you.
  10. Form 1099-LTC: The said form is used when the income arises from Long-Term Care and Accelerated Death Benefits. The link for the form is attached here for you.
  11. Form 1099-MISC: The said form is used when the income arises from Miscellaneous Income. The link for the form is attached here for you.
  12. Form 1099-OID: The said form is used when the income arises from Original Issue Discount. The link for the form is attached here for you.
  13. Form 1099-PATR: The said form is used when the income arises from Taxable Distributions Received from Cooperatives. The link for the form is attached here for you.
  14. Form 1099-Q: The said form is used when the income arises from Payments from Qualified Education Programs (Under Sections 529 and 530). The link for the form is attached here for you.
  15. Form 1099-R: The said form is used when the income arises from Distributions of Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The link for the form is attached here for you.
  16. Form 1099-SA: The said form is used when the income arises from Distributions of an HSA, Archer MSA, or Medicare Advantage MSA. The link for the form is attached here for you.

In today’s time, Form 1099-DIV, Form 1099-INT, Form 1099-MISC and Form 1099-R is the most commonly used forms.

 

Form 1099 filing requirement

Every individual must file separate Form 1099 for each covered transaction as stated above.

It’s always better to make four copies of Form 1099:

  • One for the payer,
  • One for the payee,
  • One for the IRS,

&

  • One for the State Tax Department.

 

Payers who file 250 or more Form 1099 reports must file all of them electronically with the IRS.

If the payer has to file lower than 250 forms then paper copies are to be filed with IRS. The IRS may also require the payer to submit a copy of Form 1096 (Form 1096 is a form which is a summary of information forms being sent to the IRS).

The returns must be filed with the IRS by the end of February immediately following the year for which the income items or other proceeds are paid.Also, the copies of the returns to be submitted to IRS must be sent to payees by the end of January.

 

The below are the payment variant which triggers the need for issuing Form 1099. The table also provides the person who is responsible for issuing the same.

 

Form Use Minimum Amount at which the Form is issued Who issues the form?
1099-A Acquisition or Abandonment of Secured Property Any amount Lender
1099-B Proceeds from Broker and Barter Exchange Transactions Any amount Broker or barter exchange
1099-C Cancellation of Debt $600 Lender
1099-CAP Changes in Corporate Control and Capital Structure $100 million Corporation
1099-DIV Dividends and Distributions $10 ($600 for liquidations) Investment fund company
1099-G Government Payments $10 Government agency
1099-H Health Insurance Advance Payments Any amount Provider of health insurance coverage
1099-INT Interest Income $10 ($600 for some interest) Payer of interest income
1099-K Merchant Card and Third Party Network Payments $20,000 Banks and other payment processors
1099-LTC Long-Term Care Benefits Any amount Insurance company
1099-MISC Miscellaneous Income $600 for non-employee compensation ($10 for most others) Employer
1099-OID Original Issue Discount $10 Issuer of the debt instrument or broker
1099-PATR Taxable Distributions Received From Cooperatives $10 Cooperative
1099-Q Payment from Qualified Education Programs Any amount Administrator or bank that manages one’s 529 plan or Coverdell ESA
1099-R Distributions from Pensions, Annuities, Retirement Plans, IRAs, or Insurance Contracts $10 Custodian
1099-S Proceeds from Real Estate Transactions $600 Person responsible for closing the transaction; if no one is responsible for closing the transaction, then in order: the mortgage lender, the transferor’s broker, the transferee’s broker, or the transferee
1099-SA Distributions From an HSA, Archer MSA, or Medicare Advantage MSA Any amount Institution that administers the HSA or MSA
SSA-1099 Social Security Benefit Statement Any amount Social Security Administration
RRB-1099 Payments by the Railroad Retirement Board Any amount Railroad Retirement Board
RRB-1099-R Pension and Annuity Income by the Railroad Retirement Board Any amount Railroad Retirement Board

 

 

Steps to file your Form 1099:

Preparing and filing 1099s can be very tedious and time-consuming process. As you may employ a number of contractors and it would be stressful work to keep track and manage all the details. The process soon becomes a headache.

The below are the steps to be followed to file Form 1099:

  • Get the respective required Form 1099: You are required to only use specific form 1099 that is readable by the IRS scanner. You can order these forms from the IRS by calling 1-800-TAX-FORM (1-800-829-3676) or going on their website. There are also alternative ways for getting these forms; you can order them from some office-supply stores, or you can use financial software like QuickBooks to create, distribute and file the proper 1099s.Note: Please check all the forms required by you for your respective income and number of copies to be ordered.

 

  • Fill out 1099: Before starting to fill in all details on Form, please cross check the contractor details (name, address, social security number) with the contractor and other related data so as the information submitted is correct.

 

Please keep in mind: for every Form 1099, the amount of money paid to the contractor should be entered in Box 7 under the title “Non-employee compensation.” If you are withholding any pay from the contractor then you will also need to fill in Box 4 or 11 in relation to any federal or state income tax you withheld.

If you are withholding any pay from the contractor then you will also need to fill in Box 4 or 11 in relation to any federal or state income tax you withheld.

Note: It’s always better to integrate Form 1099 process with your existing financial software. The form would extract all the details and information automatically from the accounting software as uploaded and entered for you. This process would save you time and reduce the chances of any potential for human error.

 

Sending the forms:

Each Form 1099 must be made into 5 copies. Please make sure to write or type on the top copy so it transfers down onto each copy.

  • Copy A is to be sent to the IRS
  • Copy 1 to be sent to appropriate state tax agency
  • Copy B and Copy 2 to be sent to the income’s recipient (the income recipient after receiving the two copies, will attach one copy of the form to their respective return and keep the other copy with themselves for record keeping and future usage.)
  • You can keep Copy C for your own records.
  • Fill Form 1096: After you have filled out all of your 1099 forms for the year, you need to fill out a Form 1096 as well. Form 1096 summarizes all of your 1099 forms and is filed with the IRS.

Note: The mailing address is on the last page of the Form 1096 instructions.

 

How to file 1099- MISC?

 

Form 1099-MISC is used when the income arises from miscellaneous sources and amount of payment exceeds 600$. The link for the form is attached here for you.

Form 1099-MISC is received by the individuals who are either self-employed or worked as an independent contractor during the previous year. The IRS refers such amount of payment as “non-employee compensation.” In most circumstances, your clients are required to issue Form 1099-MISC when they pay you $600 or more in any year. As a self-employed person, you are required to report your self-employment income if the amount you receive from all sources totals $400 or more. In this situation, the process of filing your taxes is a little different than a taxpayer who only receives regular employment income reported on a W-2.

In most circumstances, your clients are required to issue Form 1099-MISC when they pay you $600 or more in any year. As a self-employed person, you are required to report your self-employment income if the amount you receive from all sources totals $400 or more. In this situation, the process of filing your taxes is a little different than a taxpayer who only receives regular employment income reported on a W-2.

As a self-employed person, you are required to report your self-employment income if the amount you receive from all sources totals $400 or more. In this situation, the process of filing your taxes is a little different than a taxpayer who only receives regular employment income reported on a W-2.

 

Filing due date for Form 1099 MISC:

Public Law 114-113, Division Q, section 201, requires you to file Form 1099-MISC if you are reporting non employee compensation payments in box 7 on or before January 31 of each year by using either paper or electronic filing procedures.

For all other reported payments, the due date to file Form 1099-MISC is February 28 of each year if you file on paper or April 2 of each year in case you are filing the same through using the electronic procedure.

Note:  The penalty for missing the deadline amounts to $30 – $100  per form, with a maximum fine of $500,000 per year. If a company completely disregards the requirement to provide a correct statement, a higher penalty can be imposed of $250 per form, with no maximum.

 

Who to file Form 1099? Whom to send the form?

Every individual who has employed contractors and paid them more than $600 in business-related payments in the previous year is responsible to prepare and issue an IRS Form 1099-MISC.

You must send out a Form 1099-MISC to all contractors you’ve hired and paid more than $600 during the year; this includes any partnerships or LLCs you may have contracted throughout the year.

Note:  Form 1099-MISC is to be filed only when payments are made in the course of your trade or business.  No personal payments are not to be reported in the form

The exception to this rule is: The most important exception to keep in mind is that you don’t need to send 1099 forms to corporations. If the person or company you hired is classified as a c-corporation or s-corporation, you don’t need to worry about filing 1099.

The process to File Form 1099:

 

The IRS link provides complete details for filing and completing Form 1099 MISCis attached here for you.

 

I am attaching a few important pointers to be followed while submitting the form:

  1. Payment Amounts Enter amounts paid in the appropriate box:
  • Box 1 is used to enter amounts you paid in rents.
  • Box 2 is used to enter amount of Royalties paid for intellectual property (patents, copyrights, trademarks)
  • Box 3 is used to enter other income payments, including prizes and awards (boxes 3 and 7); including sweepstakes payments (but not prizes and awards to employees; payments for participants in research studies, and punitive damages.
  • Box 6 is used to enter medical and health care payments (the payments are to be made to the physician or other supplier or provider of medical or health care services and also includes any payments made by medical and health care insurers under health, accident, and sickness insurance programs. But does not include payment made to pharmacies for prescription drugs. )
  • Box 7 is used to enter the amount paid for services performed by a non-employee (including parts and materials; include here expenses for the use of an entertainment facility that you treat as compensation to a non-employee.
  • Box 9 is used to enter amount paid for direct sales of $5000 or more of consumer products for resale
  • Box 14 is used to enter gross proceeds paid to an attorney.
  • Any amounts of federal income tax withheld from payments to the recipient should be entered in Box 4.
  • Boxes 15a and 15b are used to record Section 409A deferrals and income.
  • Any amounts of state tax withheld from payments to the recipient should be entered in Box 16.

 

  1. Always double check your form before filing. A few of common errors to avoid are:
  • Using the form for the wrong year.
  • All the forms must be approved under IRS guidelines. Thus if you are using the unapproved form then it would lead to default in the filing.
  • Sending a 1099-MISC form to an employee.
  • Missing out to fill in payee tax ID numbers
  • Failing to include decimal and cents on amounts.
  • Failing to use black ink (making entries too light) or making entries too large or too small. Note: The IRS suggests you use 12 pt. and “Courier” type font for printing 1099-MISC forms.
  1. The rest of the steps are same as stated as above under the heading “Steps to file your Form 1099”.

 

 

 

The difference between Form W9 and Form 1099

 

The below is the list of differences in between the 2 forms.

Particulars Form W9 Form 1099
Definition Form W-9 is a request application sent for gathering taxpayer identification number and details from the contractor. Form 1099 is a form used for reporting non-employment income from a given source for a year.
Which one is first Form W 9 is to be issued first to gather all appropriate correct information. Form 1099 is updated with information collected from Form W9

 

Form 1096

Form 1096 is an Internal Revenue Service (IRS) tax form used in the United States to summarize information of all returns being submitted to the IRS. Form 1096 is only used when you are physically filing forms to IRS. Form 1096 will be submitted along with each form you are submitting to IRS.Separate Form 1096 should be attached with each form.

Note:  If you are filing the forms through an electronic medium, then Form 1096 is not required.

Form 1096 has two separate due dates for submission of return to IRS depending on the form to which you are attaching and sending to IRS:

  • Form 1096 is to be submitted by the end of February each year when the form used with Forms 1097, 1098, 1099, 3921, 3922 or W-2G
  • Form 1096 is to be submitted by the end of May when the form is used with Forms 5498.

Please find the link to Form 1096 is attached here for you.

To order the form, you can order these forms from the IRS by calling (1-800-829-3676) or going on IRS website. There are also alternative ways for getting these forms; you can order them from some office-supply stores, or you can use financial software like QuickBooks to create, distribute and file the proper 1096s.

 

Disclaimer: The above details for Form 1099 and related are information is generic in details, for specific details relating to your industry or business you can connect with your CPA and gather relevant information and procedural details.

Read the article and take necessary steps to be compliant on the same so as to avoid any penalties and prosecutions.Nowadays many software solutions are also available to make these form generation and submission process hassle-free and streamlined.

 

2017-09-25T10:23:30+00:00

About the Author:

Hi, I am Tarannum. I am CA and working in accounting for 10 years. You can subscribe to my blog or join us on facebook.