Understanding 1099s: A Simple Guide for Small Business Owners

1099’s can be confusing when it comes to a business. What are 1099’s? When do you need to send them out? How do you do it correctly the first time? 

To help with some of that confusion, we’ve created this brief primer to break this down step-by-step to help you avoid stress, stay compliant, and keep your business running smoothly.

What Is a 1099 Form?

A 1099 form is used to report income that isn't from a regular job. 

If you pay someone more than $600 in a calendar year for work that isn't performed as an employee, you must report it to the IRS using a 1099 form. 

Some examples of non-job income are:

• Money paid to freelancers or self-employed people for services
• Rent paid to your landlord
• Prizes or awards
• Payments for healthcare or medical work

These payments are not the same as the money you pay your regular employees (that would be classified as W-2 wages and would need a W-2 issued and taxes withheld), and they still need to be reported. This means if you pay for rent, healthcare services, or give out prizes, you might need to send a 1099.

If you own a small business, you need to file these 1099 forms with the IRS and also give copies to the person you paid. Keeping good records of who you paid and how much is very important. 

This helps avoid penalties and ensures you have proof if the IRS has questions. If the IRS ever checks your business, you’ll need to show them all your records.

W-9 vs. 1099: What’s the Difference?

Before you can give someone a 1099, you need a W-9 form from them. The W-9 form collects important information such as the employee's name, address, and tax ID number. You need this information to fill out a 1099 form later.

Think of it like this:

• W-9 = Collecting Information
• 1099 = Reporting Payments

If you pay someone more than $600 in a year, you need their W-9 form. 

PRO TIP: It’s best to get this before they even start working so you’re not trying to get it at the last minute. 

Integrate the collection of the W-9 into the process of the contract or agreement for services. Making it a habit to collect W-9s early means fewer problems later in the process of issuing the 1099.

Steps to Make 1099s Easy

Here are a few simple ways to make the 1099 process easier and more efficient.

Getting 1099s done right doesn’t have to be stressful. Here are some simple steps you can take:

1. Collect W-9 Forms Early: Make it a rule—before a contractor starts work, get their W-9 form. This way, you have everything you need from the start, which means no stress later on.
2. Track Payments All Year: Document the payments you make to each contractor as you go throughout the year. You can use a spreadsheet or accounting software to help you stay organized. Prioritizing doing this on a regular basis (we recommend a weekly habit of record keeping) will ensure accuracy in your numbers. Keeping track now will save you a lot of trouble when tax time comes. Each payment should have important details, like the date, what the payment was for, and how much.
3. Do a “pre-year end” AUDIT in December: In early December, look at all the payments you made from January to November. Make a report for each contractor showing how much you paid them. Send them this report and their W-9 so they can check that everything matches. This way, if there are any mistakes, you can fix them before it’s time to send out the 1099s. 

Why This Helps: Doing this in December means you only need to update payments for December when January comes around. It makes sending out 1099s quick and easy. A smooth system helps you avoid mistakes and late fees. 

PRO TIP: Schedule this task to be done quarterly to keep a running total or tabs on what you are paying out during the year. Automate the process by putting a recurring calendar pop up into your calendar system.

Who Is Not Required to File a 1099?

You are not required to file a 1099 form if any of the following situations apply:

• You Are Not Engaged in a Trade or Business: If you are not engaged in any trade or business, you do not need to file a 1099 form. There is no need to substantiate a business write off and therefore no requirement to issue a 1099.
• Incorporated Businesses: If you are engaged in a trade or business, you do not need to issue a 1099 if the payment was made to another business that is incorporated, unless it was for medical or legal services. Audit Tip: It is advisable to maintain records of your contracts or service agreements to justify the expense if you are ever questioned.
• Payments Less Than $600: If the total of all payments made to a person or unincorporated business is less than $600 in one tax year, you are not required to issue a 1099.

Will the IRS Disallow My Deduction if I Don’t Issue a 1099?

If you pay a contractor $600 or more during the year, you are generally required to issue a Form 1099-NEC to report the payments. The IRS uses this form to verify that the contractor reported the income.

If you don't issue a 1099, the IRS could disallow the deduction for that contractor's labor expense because you haven't properly reported it. During an audit, the IRS might scrutinize whether the expense is valid, and failure to issue a 1099 could be seen as not following tax compliance rules. This could lead to penalties and a possible denial of the deduction if the IRS believes the contractor payment is not legitimate.

A good approach would be to always issue 1099s for contractors when required. It helps keep your deductions safe and reduces the risk of penalties or disallowed expenses.

More Ways to Make 1099s Simple

Here are some extra tips to help you:

• Use Accounting Software: Programs like QuickBooks or FreshBooks can help you keep track of payments automatically. These tools can also remind you when you need to send a 1099, so nothing is missed.
• Check for Changes Every Year: Tax rules can change, so make it a habit to check for any updates each year. This helps you stay compliant and avoid surprises.
• E-File for Convenience: Filing your 1099s electronically is faster and makes fewer mistakes. Plus, if you e-file, you have until March 31, instead of February 28, to get it done.

Important Deadlines You Need to Know

• January 31: You need to give 1099s to your contractors by this date. They need these forms to file their taxes.
• March 31: If you file electronically, you have until this date to send the forms to the IRS (or until February 28 if you’re mailing them).

If you miss these deadlines, you might have to pay penalties. The late fees can add up fast—starting at $50 per form if it’s up to 30 days late. For small businesses, these fines can be a big deal, so it’s best to be on time.

Common Mistakes to Avoid

1. Not Getting W-9s Early: If you wait until tax time to get W-9 forms, it can delay everything. Make sure you collect them before work begins so you’re not scrambling later.
2. Not Knowing the $600 Rule Isn’t Always True: There are some payments, like legal fees, that need a 1099 no matter how much you pay. Make sure you know the exceptions.
3. Incorrect Information: If you make mistakes on a 1099, it can be rejected. Always double-check names, addresses, and tax numbers against the W-9 form.
4. Using the Wrong 1099 Form: There are different types of 1099s, like 1099-MISC and 1099-NEC. Using the wrong one can cause problems. Make sure you understand which form to use for each type of payment.

Quick Tips to Remember

• Get W-9s Early: Do this before work starts so all the information is ready.
• Keep Track of Payments: Write down all payments you make each month so you’re ready at the end of the year.
• Check Everything in December: Make sure your records match with what the contractor has before January.
• Use Technology: Accounting software can help you track payments and create reports easily.
• Know the Special Rules: Some payments have special rules, like legal services. Make sure you know what needs to be reported.

If you’re the one getting paid, it’s also important to make sure your records match what the person paying you has. Check your W-9 and talk with them to make sure everything is correct. Good communication makes sure both sides have the same information.

Mistakes in tax reporting can cause a lot of trouble later. Take some time to check your numbers, talk to contractors, and make the process simple for everyone. Being proactive—whether you’re paying or being paid—will save time and stress.

Are You Ready for 1099 Season?

The best time to start is now—be organized and make tax compliance easy for yourself and the people you work with. Plan ahead, think about tax season before it arrives, and set up systems today that will help you tomorrow. By following these steps, you can avoid common problems and make 1099 filing as easy as possible.

Remember: Getting ready early means less stress later. Are you ready to take on 1099 season with confidence?

This article is part of the MakeTaxesFair.com CLEAR EDGE Framework and belongs in the “GETTING ORGANIZED” Pillar of the framework. Being organized is a huge component of a Tax Saving System to pay less to the government. It may seem simple but implementing a system around tracking and verifying 1099’s is critical to be organized and ensure that your deductions are properly captured.

If you have questions or need help, make sure to reach out and start a conversation.