Are you a business owner? Did you hire individuals to perform work? Does the contractor perform work for your business? Then you are responsible to issue a 1099 information return to the contractor and to the IRS.
Getting confused? Don’t worry! We will let you know when should a startup sends IRS Form 1099 MISC to the individuals. Besides, we also provide you information about what 1099 information return you need to send to contractors. Find out whether a tax-exempt entity receives a 1099 or not.
What 1099 Tax Forms do I send to contractors?
Firstly, before determining what 1099 information you need to issue to contractors identify whether the person is a contractor or not. The person is a contractor when you pay him/her apart from regular salaries or wages. Next, decide which 1099 Tax Form do you need to send to a contractor. According to the IRS, there are nearly 20 variant tax forms in the 1099 series. Among them, the most common tax forms are:
IRS 1099 MISC
When you made payments related to rent, royalties, prizes, or rewards on the course of business, then send 1099 MISC at the year-end to the contractors.
Form 1099 NEC
Send 1099 NEC Form to the contractor if you made payments to non-employees as prizes or rewards for performing services related to business or trade.
Do I have to issue a 1099 MISC to a contractor?
If your business satisfies anyone among the below criteria, then you have to issue a 1099 MISC to the contractor:
Payments exceeding $600
When the payments made throughout the tax year apart from regular salary exceed $600, then you need to issue IRS 1099 MISC.
Compensation paid on the course of business or trade
Along with the reporting threshold, if the compensation paid is related to performing services to business or trade then issue the tax form.
An individual is not a corporation
The individual whom you hired is not an S or C corporation, then you must issue a 1099 MISC Tax Form.
Examples of who gets a 1099 MISC Tax Form
Given below are some examples of who gets a 1099 MISC tax form:
If you rent a house to extend your office space, pay the individual $900 throughout the tax period. Since the rent paid to the individual is considered as miscellaneous income and exceeding the $600 threshold. The individual receives 1099 MISC by the end of January of the following year.
When you pay an attorney for providing legal information related to your business and the payment exceeds $600, then issue a 1099 MISC.
If you made direct sales of $5,000 on a buy-sell basis of consumer products for reselling, then issue Form 1099 MISC and report the amount to the IRS.
Who is exempt from an IRS Form 1099 MISC?
Following are the exempt payees to who you are not required to issue a 1099 information return form:
- If the payee is C or S corporation and performs services related to business, then the payee is exempted from receiving 1099 MISC. But in some circumstances, the payee receives the tax form when you made payments related to medical and healthcare.
- Payments made to the individuals don’t exceed the $600 reporting threshold throughout the tax year.
- Certain payments like rental payments made to real estate agents, tax-exempt entities, or trusts are exempted.
- The IRS exempts payments made to organizations for telephone, freight, storage, etc.
Do I need to issue a 1099 Form to a tax-exempt entity?
A tax-exempt entity is free from tax at the federal, local, or state level. Hence, payments made to tax-exempt organizations including tax-exempt trusts are not reportable on a 1099 MISC Tax Form.
However, the individual who receives 1099 must report the income received on their tax return. Otherwise, the IRS may consider it as underreporting income. Finally, instructs the payers to withhold taxes from your income. So, to avoid unwanted penalties it is better to report income on the respective tax return form.
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