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 information (1099-MISC) or nonemployee compensation (1099-NEC). Here is a list of payments that qualify as miscellaneous information:
- Rent payments
- Royalties
- Prizes and awards
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish
- Payments made to an attorney
- Other
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 Information. Use Form 1099-MISC to report how much you paid in miscellaneous payments.
For each 1099 contractor you pay at least $600 in nonemployee compensation, complete and file Form 1099-NEC, Nonemployee Compensation.
Only include miscellaneous payment amounts you paid 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).
Handle 1099s with Patriot’s accounting software
Create and print as many 1099s and 1096s as you need, all within your account.
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).
If you make an error on a 1099, you can issue a corrected Form 1099. For more information on your reporting responsibilities associated with 1099 payments, consult the IRS.
Easily pay contractors and vendors with Patriot’s accounting software. And, you get unlimited access to create and print Forms 1099 and 1096. Get your free trial today!
This article is updated from its original publication date of July 7, 2013.
This is not intended as legal advice; for more information, please click here.
FAQs
1099 employees are responsible for paying their own self-employment taxes, as well as income taxes. 1099 employees are not to have any taxes withheld from their paychecks. 1099 employees must have their own insurance. 1099 employees must have their own business insurance, such as liability insurance.
Are you responsible for a 1099 employee? ›
A company that hires an independent contractor is not responsible for tax withholdings, benefits, or workers' compensation coverage for the 1099 employee. The company is, however, responsible for paying the independent contractor for their services. An independent contractor can set their rates or fees.
What are an employer's responsibilities for with 1099 employees? ›
Businesses must use Form 1099-NEC (non-employee compensation) to report payments to 1099 employees. Companies must report and file any compensation exceeding $600 annually for contractors, consultants, freelancers, and other self-employed people who perform work or services for the company but are not employees.
Whose responsibility is it to file a 1099? ›
The payer is responsible for filling out the appropriate 1099 tax form and sending it to you. The IRS requires payers to provide most 1099 forms by January 31.
What do I need to know about being a 1099 employee? ›
What do I need to know before being a 1099 employee?
- You will be considered self-employed and responsible for paying your own taxes.
- You won't have access to benefits typically provided to W-2 employees, such as health insurance or paid time off.
- You'll need to track your income and expenses for tax purposes.
A contract with the right information protects the parties on both sides of a 1099 employment agreement. For both 1099 employees and companies that employ them, their contracts can be especially important if a disagreement arises.
What are the rules for 1099? ›
The 2023 IRS 1099 rules for Form 1099-MISC (for 2024 filings) require business payers to report payments of $600 or more for specified types of income and other payments, at least $10 in royalty payments, backup withholding of income taxes, and if your business made direct sales of at least $5,000 of consumer products ...
Can 1099 employees be told when to work? ›
Many people ask, “Can you tell an independent contractor when to work?” The answer is no. As an independent, you are free to work whenever you like, unless specified in your contract.
What are the new 1099 rules for 2024? ›
H.R. 7024 would increase the reporting threshold for the 1099-MISC and 1099-NEC from $600 to $1,000 for payments made on or after January 1, 2024. For future years, this threshold would be tied to inflation. The bill would also decrease the reporting threshold for payments of direct sales from $5,000 to $1,000.
Do 1099 employees need to give two weeks notice? ›
Do I have to give 2 weeks' notice before quitting a job in California? In California, there is generally no requirement that you give your employer two weeks notice, or any notice for that matter, before quitting or terminating a job.
Generally, the person responsible for “closing” a reportable transaction is required to file Form 1099-S. However, determining who is responsible for “closing” the transaction can differ depending on the specific facts of the transaction.
Do I need to issue a 1099 to my cleaning lady? ›
One of the common misunderstandings around household employment is whether you should consider them an independent contractor and provide them a Form 1099-C during tax time. The short answer is no, you can't give your household employee a 1099.
Can you 1099 someone you paid cash? ›
Cash payments of $600 or more to an independent contractor should be reported on a 1099 form, regardless of the payment method. Neglecting to issue the appropriate tax forms for cash payments can lead to tax implications and penalties.
What is an employer responsible for with a 1099 employee? ›
As the employer, you're responsible for filing Form 1099-NEC. You must file a 1099-NEC for each 1099 employee you paid $600 or more to during the year. You should file 1099-NEC by January 31st of the year following the tax year in which you made the payments.
What are the disadvantages of being a 1099 employee? ›
Cons Explained
In many cases, contractors are not eligible for state unemployment benefits because they're self-employed and must fund their retirement accounts. Health and liability insurance rates for self-employed individuals are usually higher than the group rates employers can secure for their employees.
How much can you make on a 1099 before you have to claim it? ›
How does an independent contractor pay taxes? If you earned $600 or more during the year (regardless of whether you received 1099s for that work), you'll need to file an income tax return when tax time rolls around.
What do I do if my employer doesn't give me a 1099? ›
If you have not received an expected 1099 by a few days after that, contact the payer. If you still do not get the form by February 15, call the IRS for help at 1-800- 829-1040. In some cases, you may obtain the information that would be on the 1099 from other sources.
Can I be sued as a 1099? ›
Yes, in certain instances you may be able to sue a 1099 contractor. For example, you might get injured by an independent contractor doing work for an employer. You might have paid someone to do a job that they end up not doing.
What if my employer gives me a 1099 instead of a W-2? ›
What Should I Do If I Am Getting a 1099 Instead of a W-2? If you are getting a 1099 form instead of a W-2 and think you should be classified as an employee, you should first contact your employer to be reclassified correctly. If the employer disagrees, you can have the IRS make the determination.
Is a 1099 technically an employee? ›
A 1099 employee is an independent contractor. The name derives from the Internal Revenue Service's (IRS) Form 1099, which contract workers must complete to report their earnings. Freelancers, consultants, self-employed workers, and sole proprietors are common types of 1099 employees.
