As a small business owner, you regularly make payments to the vendors you work with and pay wages to your employees. But if you deal with a 1099 vendor or contractor, the amounts of money you give them are considered 1099 payments.
To keep your business legal, you need to understand what 1099 vendors and 1099 payments are, as well as your reporting responsibilities when you make this type of payment.
What is a 1099 vendor?
A 1099 vendor is someone who does work for your business. So, who is a 1099 vendor? Examples include independent contractors and attorneys.
If you hire a 1099 vendor to perform work at your business, do not include them on your company’s payroll. They are not an employee, so they do not receive hourly or salary wages for each payroll period. Instead, a 1099 vendor will send you a 1099 invoice after performing work for your business. An invoice is an electronic or paper request for payment. It includes when the payment is due, information about the product or service, and payment terms.
Because a 1099 vendor is not on your company’s payroll, do not withhold taxes from their payments. 1099 vendors are responsible for withholding taxes from their income. However, your duties don’t end once you pay them. You need to accurately report their payments to the government. That way, the government can see how much income the 1099 reportable vendor received and verify that they withheld taxes.
What are 1099 payments?
1099 payments are the amounts you give 1099 vendors in exchange for their work. A 1099 payment can also be called miscellaneous income or nonemployee compensation. Here is a list of payments that qualify as miscellaneous income:
- Rent payments
- Wages paid to independent contractors (nonemployee compensation)
- Prizes and awards
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish
- Payments made to an attorney
When you make 1099 payments, you need to report the amount you pay.
Your reporting responsibilities
Before a 1099 vendor performs work for your company, you must give them a copy of Form W-9 to fill out. Form W-9, Request for Taxpayer Identification Number, gives you the 1099 vendor’s personal information so you can report their payments to the IRS.
For each 1099 vendor you pay at least $600 to, you must complete and file Form 1099-MISC, Miscellaneous Income. Use Form 1099-MISC to report how much you paid in miscellaneous income.
For each 1099 contractor you pay at least $600 in nonemployee compensation, complete and file Form 1099-NEC, Nonemployee Compensation.
Only include how much you paid in miscellaneous income on Form 1099-MISC and nonemployee compensation on Form 1099-NEC. Do not make a Form 1099 for payments you made to employees (use Form W-2 instead).
There are different boxes on Form 1099-MISC for each type of 1099 payment (e.g., rent payments, royalties, etc.). You will mark the payments in the box that correspond to the type of 1099 vendor you hired. Only use Form 1099-NEC to report nonemployee compensation.
Send Forms 1099 to the IRS. You also need to send it to the state tax department, if applicable. And, distribute copies of Form 1099 to vendors and contractors. You also need to save a copy for your records.
When you distribute Form 1099 to the IRS, you also need to send Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Form 1096 summarizes all your Forms 1099 in a series. If you need to file both Form 1099-MISC and Form 1099-NEC, file two Forms 1096 (one to accompany each form).
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This article has been updated from its original publication date of 7/22/2013.
This is not intended as legal advice; for more information, please click here.