If you run a small business and work with independent contractors, freelancers, or gig workers, issuing 1099 forms is an essential part of your tax responsibilities. The IRS requires businesses to report payments made to non-employees using the appropriate 1099 forms so these workers can properly report their income to revenue authorities.
Using online bookkeeping can simplify this process, helping you keep track of payments and ensure compliance with tax regulations. Failing to file 1099s correctly or missing deadlines can result in penalties, so it’s crucial to understand the process. This guide will walk you through the basics of issuing 1099 forms for your small business, from determining who needs one to filing them efficiently.
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What Is a 1099 Form and Who Needs One?
A 1099 form is an IRS tax document used to report income earned by non-employees. Businesses issue 1099s to independent contractors, freelancers, or vendors who perform services and are not on the company’s payroll.
The most common type of 1099 for small businesses is the 1099-NEC (Non-Employee Compensation) form. You must issue a 1099-NEC if you paid an independent contractor $600 or more during the year for services and you paid it via cash, check, or direct deposit.
If you paid a contractor via a credit card or third-party payment processor like PayPal, you’re usually not required to issue a 1099-NEC. Instead, the financial institution will issue a 1099-K to the contractor.
The final type of 1099 form that small businesses sometimes issue is the 1099-MISC. This can include various types of income like paying royalties, giving away prizes, or certain types of lawsuit settlements.
How to Collect Contractor Information
Before issuing a 1099, you must gather essential details from your contractors. The best way to do this is by having them complete Form W-9 before any work begins. This form provides:
- The contractor’s legal name or business name
- Their Social Security Number (SSN) or Employer Identification Number (EIN)
- Their tax classification (sole proprietor, LLC, etc.)
- Their current address
Keeping accurate W-9 forms on file helps prevent errors when issuing 1099s and ensures you have the necessary information for tax reporting. In addition, make sure any workers you’re classifying as contractors meet the independent contractor standards under IRS rules. You can face penalties for classifying workers as contractors when they should be classified as employees.
Steps to Prepare and File 1099s
Once you’ve identified which contractors require a 1099 and collected their W-9 information, follow these steps to issue and file the form:
1. Complete Form 1099-NEC
Each contractor who qualifies must receive a 1099-NEC, which includes:
- The total amount paid to the contractor during the year
- The contractor’s name, address, and SSN or EIN
- Your business name, address, and EIN
You can easily generate (and file) 1099 forms using popular online bookkeeping services, or get the blank forms from the IRS website.
2. File Copy A with the IRS
You also need to submit Copy A of the 1099-NEC to the IRS by January 31. Filing can be done:
- Online using the IRS FIRE system (recommended for efficiency and accuracy)
- By mail, though if you’re filing 10 or more, electronic filing is required
3. Send Copy B to the Contractor
By January 31, you also need to send Copy B of the 1099-NEC to each contractor so they can report the income on their tax return.
4. Submit Form 1096 (if Filing by Mail)
If you’re mailing 1099s instead of e-filing, you must include Form 1096, which summarizes all 1099s being submitted.
Benefits of Filing 1099s Online
Many businesses now prefer filing 1099s online rather than mailing paper forms due to the following benefits:
- Faster processing – The IRS receives and processes electronic forms quicker.
- Lower risk of errors – Digital platforms help catch mistakes before submission.
- Automatic record-keeping – Online platforms store copies for future reference.
- Compliance assurance – E-filing helps you ensure forms are submitted on time and in the correct format.
Using an online bookkeeping system or a tax software solution can further streamline this process, helping businesses stay compliant and avoid penalties.
Common Mistakes to Avoid
Mistakes in issuing 1099s can lead to penalties and additional scrutiny from the IRS. Avoid these common errors:
- Missing the January 31 deadline – Late filing can result in fines from the IRS.
- Failing to issue 1099s to eligible contractors – Not providing 1099s when required can trigger IRS audits and penalties.
- Incorrect contractor information – Ensure names, SSNs, and EINs match your records.
- Reporting incorrect payment amounts – Double-check records and reconcile them with bank statements and invoices to avoid underreporting or overreporting income.
- Not keeping records – Maintain copies of all 1099s and W-9 forms for at least three years.
What Happens If You Don’t File 1099-NECs?
The IRS takes compliance seriously, and failing to file the required forms can lead to penalties:
- $60 per form if filed within 30 days after the deadline.
- $130 per form if filed more than 30 days late but before August 1.
- $330 per form if filed after August 1 or not filed at all.
- $660 per form if the IRS finds that you intentionally disregarded your duty to file.
To avoid these penalties, make sure you’re keeping up with filing deadlines and maintaining accurate records throughout the year. Working with local accountants can help you stay on top of all your required tax form filings.
How to Stay Organized Year-Round
Keeping your tax records organized throughout the year can make tax season much easier. Here are some best practices:
- Require W-9s before payment – Request information from contractors well before tax season — preferably as soon as you start paying them.
- Use bookkeeping software – Automatically track payments and flag contractors who will need to be issued a 1099.
- Set reminders for deadlines – Mark January 31 as a critical date on your business calendar.
- Review payment records quarterly – Stay ahead of tax obligations by checking records every few months.
Properly managing 1099s is a critical responsibility for small businesses that hire independent contractors. By understanding who needs a 1099, collecting W-9 forms early, filing forms on time, and using online bookkeeping and tax filing systems, you can simplify the process and stay compliant with IRS regulations.