How To Issue A 1099: A Comprehensive Guide

Tax season brings quite a bit of work with it for business owners. That’s especially true if you have people who work for you as independent contractors. That’s because your independent contractors have to file tax returns, and to do so, they’ll need a 1099 form.  

Businesses must issue 1099s in a reasonable amount of time. These rules are in place to make sure your contractors have adequate time to file their federal income tax returns by their deadlines.

On the other hand, the United States tax code is a complex one, and making mistakes can have significant consequences. So, if you don’t know how to issue a 1099, you may be at a loss for where to even start. Don’t worry, 1099 tax forms aren’t as difficult as you may think. Follow the guide below to issue a 1099 with ease.

What Is A 1099 Form?

A 1099 tax form is one of 22 different types of forms designed to report income to the IRS. However, unlike a W2, the income reported on IRS 1099 forms does not relate to employee wages, salaries, or tips.

Different Types Of 1099 Forms

In total, there are 22 different 1099 forms, each designed for the reporting of a different type of income. However, as a small business owner, you’ll primarily focus on one type — the 1099-NEC — and you may need to file one other type from time to time. Here they are:

• 1099-NEC: The 1099-NEC is the form you’ll use to report non-employee compensation, like independent contractor compensation. This is typically the only 1099 form small business owners need to worry about.
• 1099-C: If your company extends credit to consumers, you may need to file a 1099-C from time to time. These forms are designed to report the cancellation of debt. You’ll need to file these if you write off past-due debts owed by your customers in exchange for a tax break.

Step-By-Step Process For Issuing A 1099

If you’ve never issued a 1099 in the past, the process may seem confusing at first glance. But it doesn’t have to be. Follow the 1099 instructions below to issue 1099s for your small business with ease.

Determine The Correct Form

First and foremost, the IRS requires that filers use the correct forms when they file tax documents. So, it’s important to choose the right form to file. Keep in mind that in the vast majority of cases, you’ll be filing the 1099-NEC for non-employee compensation. However, if you’re informing a customer that you’ve written off the debt they owed to your company, you’ll need to use form 1099-C.

Keep in mind that the IRS generally charges $100 per occurrence to make 1099 corrections. So, choosing the wrong form could cost you $100 each time you file erroneously.

Gather Information And Track Payments

Before you make your first payment to a 1099 contractor, you must gather their identification information. This usually includes:

• A state-issued identification card or business and contact name;
• a social security number (if you’re paying an individual) or a taxpayer identification number (if you’re paying a business);
• the payment address; and
• basic contact information like phone number and mailing address.  

Once you have this information, you’re clear to make payments to your independent contractor, but your work doesn’t stop there. To make sure filing your 1099 forms goes smoothly, you’ll want to make sure that you track 1099 income that you pay throughout the year. One of the best ways to do so is to use quality accounting software, including a 1099 calculator, throughout the year, not just during tax season.

Choose A Filing Method

In the past, the only choice you had for filing form 1099 was to mail it to the IRS after you had filled it out. However, that’s not the case anymore. Today, you have a couple of 1099 filing options.

If you’re comfortable with the tried and true method of mailing your 1099 forms to the IRS, feel free to do so. However, you can also file a 1099 online. That’s because the IRS started accepting electronic 1099 filings for the 2022 tax year. So, all you need to do is use tax software that meets all filing requirements and file your forms immediately when you complete them.

Complete The Form

There are a couple of ways to complete the 1099 form:

• Pen And Paper: Your first option is to print the 1099 form you need to file and use a pen to fill out the form, completing each line item based on the form’s instructions. However, this process is tedious and it leaves the door open to human error.
• Use A Software Solution: There is a wide range of accounting software solutions for small businesses. Taking advantage of a quality software solution will help ensure that your calculations are correct and that you don’t miss any line items. This accuracy may prove invaluable. Keep in mind that you’ll have to pay $100 each time you need to correct a 1099 form. So, if you have 15 contractors and you make the same mistake for each filing, you could face $1,500 in penalties.

File Electronically Or Mail Paper Forms

As mentioned above, you have two options for filing your 1099 forms. You can either file electronically or mail your paper forms to the IRS. Regardless of how you choose to file, make sure you do so before the filing deadline, which is January 31st. If you fail to file these forms on time, you’ll pay a penalty ranging from $60 to $310 per late form. So, missing the deadline can become costly if you need to file multiple 1099 forms. Nonetheless, here’s how you can file:

• File Electronically: You can either use your accounting software or use the IRS’ free e-file system.
• File By Mail: Send your paper 1099 forms to the Internal Revenue Service Center, P.O. Box 219256 Kansas City, MO, 64121-9256. When mailing your form, keep in mind that the IRS must receive it by the deadline. So, you may want to mail it a few days early.    

Provide Copies To Recipients

1099 forms aren’t filed just so you can take advantage of 1099 deductions as a business owner; they also make it possible for any contract workers who work for your business to file their taxes. As such, you must provide your 1099 recipients with copies of the form — or at least try to.

To do so, you should send the forms to the address you have on file for the contract worker. Make sure they have a way to update their addresses if they need to. Moreover, if the contractor doesn’t work for you anymore, you are obligated to send the form to the last-known address.

As is the case in terms of filing, you have until January 31st of each year to provide a copy of Form 1099 to any contractors you paid in the previous year. Missing this deadline could come with costly penalties.  

Prepare For Next Tax Year In Advance

Tax season shouldn’t be the only time you consider working with and organizing your tax records. Instead, this is something that should be done throughout the year, making tax season an easier season to work through.

Rather than waiting until the end of the year and scrambling to prepare your tax documents on time, it’s best to use a quality accounting and payroll software solution that keeps track of your financial data all year long. In doing so, you’ll not only be prepared when tax season arises, but you’ll constantly have access to data that gives you a better understanding of your company’s finances and opportunities to optimize them.

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