What Is a 1099 Form, and How To Fill Out a 1099 Form: Step-by-step | Mellow

As a small business owner or a team member at a larger organization who works with freelancers and remote staff in the U.S., you're likely familiar with the Form 1099. But understanding the nuances of this crucial tax document is essential to avoid penalties and ensure smooth operations. This guide will walk you through what a 1099 form is, how to obtain it, and, most importantly, how to complete it accurately.

What is Form 1099?

Form 1099 is an information return used to report certain types of payments made to individuals or entities who are not treated as employees. Think of it as the equivalent of a W-2 form, which is used for reporting wages paid to employees. However, instead of salaries, the 1099 series of forms covers various other income types, such as payments to independent contractors, freelancers, and other non-employees.

For businesses hiring workers in the United States, understanding and correctly issuing 1099 forms is a critical part of compliance with the Internal Revenue Service (IRS) regulations. Mistakes or delays in filing can lead to unwanted penalties – a pain point we aim to help you avoid.

What’s the difference between Form 1099-MISC and Form 1099-NEC?

It's easy to get confused by the different types of 1099 forms. For businesses primarily working with independent contractors, the two most relevant forms are the 1099-MISC and the 1099-NEC. Here’s a breakdown:

1099-MISC form

Historically, the Form 1099-MISC (Miscellaneous Income) was used to report payments made to non-employees for services. While still in use, its primary purpose has shifted. You'll now typically use the 1099-MISC to report other types of income, such as:

• Rents
  
• Royalties
  
• Prizes and awards
  
• Other income payments
  

1099-NEC form

The Form 1099-NEC (Nonemployee Compensation) is now the specific form used to report payments of $600 or more made during the year to independent contractors, freelancers, consultants, and other self-employed individuals for their services. This change was made to reduce confusion and streamline the reporting process.

Key takeaway: If you're paying a freelancer or independent contractor for services rendered, you'll most likely need to use Form 1099-NEC.

How do I get a 1099 form?

As the payer (the business making the payment), you are responsible for providing the 1099 form to the recipient (the independent contractor). You do not receive a 1099 form for payments you have made. Instead, the individuals or entities you paid will receive the form from you.

To obtain the official 1099 forms for filing, you have a few options:

• IRS Website: You can download official blank 1099-NEC and 1099-MISC forms directly from the IRS website (www.irs.gov). Look for the "Forms & Pubs" section.
  
• IRS Order Line: You can order paper copies of the forms by calling the IRS toll-free at 1-800-TAX-FORM (1-800-829-3676). Be sure to order them well in advance of the filing deadline.
  
• Tax Software or Services: Many accounting software programs and payroll services offer the functionality to generate and file 1099 forms electronically. This can often simplify the process and reduce the risk of errors.
  
• Office Supply Stores: You can often purchase pre-printed 1099 forms and accompanying envelopes from office supply stores. Ensure you are getting the correct year's version of the form.
  

Important Note: While you can download blank forms from the IRS website, if you are filing on paper, the IRS encourages you to use the official printed forms that have a scannable red ink. If you are filing electronically (which is recommended for efficiency and accuracy), you won't need to worry about the pre-printed forms.

How to complete Form 1099 in 4 steps (for independent contractors using Form 1099-NEC)

Let's focus on the most common scenario for businesses working with freelancers: completing Form 1099-NEC. Here’s a step-by-step guide:

Step 1: Fill out separate Form 1099s with the name, address, and total amount paid to each contractor

For each independent contractor you paid $600 or more during the tax year, you'll need to complete a separate 1099-NEC form. Here’s the information you’ll need:

• Your Business Information (Payer):
  • Your business name
    
  • Your business address
    
  • Your Employer Identification Number (EIN)
    
• Contractor's Information (Recipient):
  • Contractor's name (as it appears on their tax documentation)
    
  • Contractor's address
    
  • Contractor's Taxpayer Identification Number (TIN), which is usually their Social Security Number (SSN) or their Employer Identification Number (EIN) if they operate as a business. It's crucial to obtain the correct TIN from your contractors using Form W-9 before making payments.
    
• Payment Information:
  • Box 1. Nonemployee compensation: Enter the total amount you paid to the contractor for services during the year. This includes fees, commissions, prizes, and awards for non-employee services.
    
  • Box 2. Payer city or state: Enter your city and state.
    
  • Box 3. Not checked. This box is for backup withholding, which generally doesn't apply unless specifically instructed by the IRS.
    
  • Box 4. State tax withheld: If you withheld any state income tax from the contractor's payments, enter the amount here.
    
  • Box 5. State/Payer's state number: Enter your state's identification number, if applicable.
    
  • Box 6. State income: Enter the state income.
    

Step 2: File Copy A with the IRS

Copy A of Form 1099-NEC must be filed with the IRS by the designated deadline. You can file either electronically or by mail.

• Electronic Filing: The IRS encourages electronic filing as it's generally more efficient and accurate. You can do this through the IRS FIRE (Filing Information Returns Electronically) system or through a third-party tax software provider that supports e-filing.
  
• Paper Filing: If you choose to file by mail, you'll need to send Copy A to the address listed in the official IRS instructions for Form 1099-NEC. Be sure to use the official IRS form and envelope.
  

Step 3: Send Copy B to the independent contractor

You are required to provide Copy B of Form 1099-NEC to the independent contractor by the specified deadline. This can be done either by mail or electronically (if the recipient consents).

• Mail: Send Copy B to the contractor's last known address.
  
• Electronic Delivery: If you choose to provide the form electronically, you must obtain the contractor's consent to receive it in this format. You also need to ensure they have access to the necessary software or hardware to view and print the form.
  

Step 4: Keep Copy C for yourself

Copy C is for your business records. Keep it in a safe place for your reference.

What is the filing deadline for Form 1099?

Staying on top of the deadlines is crucial to avoid penalties. Here are the key dates to remember for Form 1099-NEC:

• To Independent Contractors (Copy B): Generally, you must furnish Copy B to the recipient by January 31st of the year following the payment.
  
• To the IRS (Copy A): If filing on paper, the deadline to mail Copy A to the IRS is also January 31st. If filing electronically, you generally have until March 31st of the year following the payment.
  

Important Note: These deadlines can sometimes shift slightly if the 31st falls on a weekend or holiday, so always double-check the official IRS instructions for the specific tax year.

For Form 1099-MISC, the deadlines vary depending on what you are reporting. For nonemployee compensation (if you are still using this form for that purpose), the deadlines are the same as Form 1099-NEC. For other types of income reported on Form 1099-MISC, the deadline to furnish Copy B to the recipient is generally January 31st, and the deadline to file Copy A with the IRS is generally February 28th (or March 31st if filing electronically).

When are 1099s due?

To reiterate, the key deadlines for the most common scenario (Form 1099-NEC for independent contractors) are:

• January 31st: Deadline to send Copy B to the contractor.
  
• January 31st: Deadline to file Copy A with the IRS (if filing on paper).
  
• March 31st: Deadline to file Copy A with the IRS (if filing electronically).
  

What are the penalties for not filing Form 1099?

The IRS takes the accurate and timely filing of information returns like Form 1099 seriously. Failure to comply can result in significant penalties. The amount of the penalty depends on how late you file the correct information return. As of the latest IRS guidance, the penalties can range from $60 to $630 per return, depending on the delay. These penalties can quickly add up, especially if you have multiple contractors.

Key takeaways to avoid penalties:

• Collect Form W-9: Obtain a completed Form W-9 from each independent contractor before making payments to ensure you have their correct name, address, and TIN.
  
• Accurate Information: Double-check all the information you enter on the Form 1099 for accuracy. Errors can lead to penalties.
  
• Timely Filing: Adhere strictly to the filing deadlines for both sending copies to contractors and submitting them to the IRS. Electronic filing can help ensure timely submission.
  
• Correct Form: Use the correct version of the 1099 form (primarily 1099-NEC for independent contractor services).
  

Navigating the world of 1099 forms might seem daunting at first, but by understanding the different types, knowing how to obtain and complete them accurately, and adhering to the deadlines, you can ensure compliance and avoid potential penalties. Remember to utilize the resources available from the IRS and consider using accounting software or services to streamline the process, especially as your business grows and your network of freelancers expands. By taking these steps, you can focus on what you do best, knowing your tax obligations are well in hand.