All about Form 1099

Financial Management

Written by: Josh Katz, CPA

Form 1099 is an essential tax document utilized in the United States to record different forms of income acquired by non-employee individuals from the company or organization they served. The paying entity must provide the form to the recipient and the IRS.

There are several types of Form 1099; each form reports different kinds of income. The most common ones are:

  • 1099-MISC: This form reports the income of independent contractors, freelancers, and self-employed individuals. It includes income from payments made for rent, royalties, or other types of income.
  • 1099-INT: This form reports interest income received from banks, credit unions, or other financial institutions. It includes interest earned on bank accounts, savings accounts, and investments.
  • 1099-DIV: This form reports dividend income from stocks, mutual funds, or other investments.
  • 1099-R: This form reports distributions from retirement accounts, such as 401(k) plans, IRAs, or pension plans.
  • 1099-K: This form reports income received from payment settlement entities, such as PayPal or credit card companies. It includes income from online sales, freelance work, or any other type of payment received through these platforms.

As a payor, it’s essential to issue the appropriate Form 1099 to the suitable recipients and submit them to the IRS within the stipulated timeframe. Failure to comply with this requirement may lead to penalties and fines.

What is Form 1099-NEC?

Form 1099-NEC is a tax form used in the US to report payments made to independent contractors or self-employed individuals. After almost four decades, the form was reintroduced in the tax year 2020, as the IRS created a new form to replace the use of Box 7 on Form 1099-MISC for reporting non-employee compensation.

The acronym “NEC” stands for “non-employee compensation,” which includes fees, commissions, and other types of compensation paid to independent contractors. Businesses typically use the form to report payments made to non-employees who have provided services to their company.

The form must be filed with the IRS by the business that made the payment and provides a copy to the independent contractor by January 31 of the following year. The payment recipient must then use the information on the form to report their income on their tax return.

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Difference between 1099-MISC and 1099-NEC

Although both the 1099-NEC and 1099-MISC forms report payments made to independent contractors, the specific form to issue depends on the reported income type.

The 1099-NEC reports payments of $600 or more to non-employees, like freelancers or consultants, for their services to the business. On the other hand, the 1099-MISC form, covers payments made to non-employees, including rent, royalties, and various other types of income. Moreover, if you need to report compensation paid for work done before 2020, the form incorporates a section for non-employee compensation.

Therefore, the key difference between the two forms is that the 1099-NEC exclusively reports non-employee compensation payments of $600 or more, while the 1099-MISC is used to report other types of payments made to non-employees.

I didn't receive a Form 1099

There are several reasons why you may not have received your 1099 form:

  1. Under the income threshold: Businesses must issue 1099 forms for $600 or more payments in a tax year. If you earned less than that, you might not receive 1099.
  2. Incorrect mailing address: The business or individual who paid you might have sent the form to the wrong address if you did not provide them with your current mailing address.
  3. Payment App: If you received the payment through a credit card, debit card, or apps like Paypal or Venmo, you should get 1099-K instead of 1099 NEC because form 1099 NEC is for cash, check, or bank transfer payments. It is important to note that payment apps cannot distinguish between personal and work-related payments. To ensure you will receive the 1099-K, you must have a separate business account to receive payments and tag any income over $600 as business-related.
  4. Lost in the mail: The 1099 form may have been lost or returned during transit despite the correct address.
  5. Payor’s Error: If the business or individual who paid you made a mistake or forgot to send the 1099 form, you may not receive one.
  6. No SSN, TIN, or EIN: The business or individual who paid you needs your identification number to issue a 1099 form. Ensure you have provided them with your correct Social Security Number, Tax Identification Number, or Employer Identification Number.

If you have yet to receive a 1099 form, contact the business or individual who paid you to inquire about it. 

If I didn't receive a 1099 form, do I still need to report it on my US tax return?​

The answer is yes. Always remember that the IRS mandates the reporting of all income. Failure to do so may result in penalties, interest, or an audit that could lead to additional taxes, interest, and penalties. Therefore, keeping track of all your income and reporting it on your tax return is crucial.

If you did not receive a 1099 form from a payor, you could still report the income on your US tax return by reviewing your records of income received during the year. This includes checking bank statements, invoices, or receipts to determine the total income received. If you received payments via a payment app, you could review your transaction history in the app to find the total amount received.

Once you have determined the total income received, report it on Schedule C of your tax return and any expenses incurred while earning it. Reporting expenses may reduce your taxable income and lower your tax liability.

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W-9 Form

Giving your payor a completed W-9 form is the best way to ensure you receive a 1099 Form in the succeeding years.

 The W-9 form includes the following fields that need to be filled out by the independent contractor:

  1. Name
  2. Business name (if applicable)
  3. Address
  4. Taxpayer identification number (either a Social Security Number or an Employer Identification Number)
  5. Federal tax classification, which can be one of the following:
    • Individual/sole proprietor
    • Partnership
    • Corporation
    • Another type of entity