Christine N. PetroneIf you are a business owner, you have likely heard of Form 1099. It is a crucial part of tax compliance and should not be ignored. The IRS uses 1099s to track payments made to non-employees, ensuring that all income is appropriately reported. Unfortunately, many business owners make costly mistakes when issuing these forms. Whether you’re hiring freelancers, paying contractors or managing vendors, knowing when and how to issue 1099s is essential for smooth operations and peace of mind.
What Is a 1099 Form?
A 1099 is an information return used to report various types of nonemployee income. The most common version for businesses is Form 1099-NEC (Nonemployee Compensation), which reports payments to independent contractors and service providers. There’s also Form 1099-MISC (Miscellaneous Information), used for other types of miscellaneous income like rent, legal settlements and prize winnings.
Who Needs a 1099-NEC?
If your business pays an individual or unincorporated business $600 or more during the tax year for services, you’re generally required to issue a 1099-NEC to that payee and file a copy with the IRS. This includes freelancers, consultants, independent contractors and service providers. Starting with the 2026 tax year, the One Big Beautiful Bill Act (OBBBA) increased the threshold to $2,000 and will continue to be adjusted for inflation in later years.
Who Needs a 1099-MISC?
If your business pays an individual or unincorporated business $600 or more during the tax year for certain types of miscellaneous income, you’re generally required to issue a 1099-MISC to that payee and file a copy with the IRS. This includes things like rent, royalties, prizes or awards, medical and health care payments, and certain settlement payments, such as taxable damages. Starting with the 2026 tax year, the OBBBA increased the threshold to $2,000 and will continue to be adjusted for inflation in later years.
Who Doesn’t Need a 1099?
A 1099 does not need to be issued to employees who receive a W-2, to corporations or vendors who paid you by credit card or to other third-party processors, such as Venmo or PayPal. It is the responsibility of third-party processors to issue a 1099-K for payments you made through these networks.
Exceptions to the Rule
Yes! Although you do not need to issue a 1099 to a business that is incorporated, this does not apply to attorneys and certain medical providers – they would still be required to receive a 1099.
What Information Should You Obtain?
Before you pay any contractor, request a Form W-9. This form provides their legal name and/or business name, tax classification address and taxpayer identification number. Having this on file ensures you can accurately complete their 1099 at year-end.
Filing Deadline Requirements
By January 31, Copy B of Form 1099-NEC needs to be sent to your contractors, and Copy A of Form 1099-NEC needs to be filed with the IRS. By February 28 (or March 31 if filing electronically), Form 1099-MISC needs to be filed with the IRS.
Why Timely Filing Matters
You might wonder why the IRS is so strict about 1099s. The reason is that independent contractor income is one of the most underreported types of income in the U.S, and the 1099 system helps close that gap. Failing to issue 1099s can lead to more than just late fees. If the IRS finds you intentionally disregarded the filing requirement, it could trigger a payroll tax audit.
How To File 1099s
If you have 10 or more combined information returns, the IRS now requires you to file electronically using the Filing Information Returns Electronically (FIRE) system or an approved e-file provider. If you’re filing fewer than 10 forms, you can still choose to file by mail, but it’s often easier and faster to file online. Combined forms include Form1099s, W-2s, 1042s, 1095s and others.
Tips for Staying Organized
Issuing 1099s is an essential part of running a compliant and professional business, and there are many ways you can stay proactive throughout the year. Be sure to track payments year-round. Many accounting software systems allow you to mark vendors as 1099 vendors. When working with a new vendor, require them to provide a new W-9 Form before you issue the first payment. This helps ensure you have all the required documentation come filing time, and you are not scrambling last-minute to get it. A little organization early on can save you big headaches and potential IRS trouble later!
By understanding the rules, maintaining accurate records and staying on top of deadlines, you can avoid costly penalties and go through each year with confidence.
Christine N. Petrone, CPB, is an Accounting & Advisory Services Director at Dannible & McKee, LLP, a Syracuse-based public accounting firm that has been delivering expert tax, audit, accounting, valuation and consulting services since 1978. For more information on this topic, contact Christine at cpetrone@dmcpas.com. To learn more about Dannible & McKee, please visit DMCPAS.COM.
