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A Beginner’s Guide to Form 1099

Jan 12, 2023

Form 1099 is one of the tax forms provided by the IRS to report various types of income except wages, salaries and tips. This form is used to report the payments made to independent contractors, rental property income, income from interest and dividends, sales proceeds and other miscellaneous income.

Who can file the Form 1099?

Any person or entity can e-file Form 1099 with the Information Returns Intake System (“IRIS”)1:

  • Individuals and small businesses
  • Large businesses
  • Tax exempt organizations
  • Government agencies
  • Transmitters2
  • Software developers
  • Third-party filers

Due date to submit Form 1099

If you are the person making payments for the services received, you are required to submit the forms to the taxpayers3 by January 31 and ensure that a copy of the same is sent to the IRS by February 28 of the same year.

There are a couple of modes for submission to the IRS. You may either email or e-file. In case of  email, submit the form by February 28; for e-filing, the deadline is March 31, except for 1099-NEC, which must be submitted by January 31. Also, if the filer has at least 250 forms, they must be submitted electronically.

The requirement above applies separately to each type of form. For example, if you must file 600 Forms 1098 and 100 Forms 1099-A, you must file Forms 1098 electronically, but you are not required to file Forms 1099-A electronically.

If the date falls on a weekend, the deadline will be extended to the following Monday or the next business day if Monday is a public holiday.

Automatic Extension

There is an automatic extension of 30 days to file the Form 1099 by completing Form 8809. The same could be done through paper or the Filing Information Returns Electronically (“FIRE”) system, either as a fill-in form or via e-file. It is mandatory to have a signature and an explanation if you’re filing an extension. In case of genuine hardships, an additional 30-day extension is allowed. However, no extension is allowed in the case of Form 1099-NEC.

Mandatory Employer Identification Number (“EIN”)

All Form 1099 filers must have an EIN. If you have not previously filed a Form 1099 or other return, you must obtain an EIN and include it on each Form 1099 that you file.

Failure to e-file penalty

If you are required to file electronically but fail to do so, and you do not have an approved waiver, you may be subject to a penalty for failure to file electronically—except when there is a reasonable cause. The maximum penalty is $290 per return. However, you can file up to 249 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.

Types of Form 1099

There are various types of Form 1099s:

  1. 1099-B: Proceeds from Broker and Barter Exchange Transactions – If you are a securities broker, you must report and provide a Form 1099-B for each person for whom you have sold (including short sales4) stocks, bonds, commodities, regulated futures contracts, foreign currency contracts, forward contracts, debt instruments and so forth for cash. You must report cost basis in addition to proceeds from these transactions. Cost basis information makes the calculation of gains and losses easier for taxpayers.

This form provides information to the taxpayer on:

  • A brief description of the item sold, such as “1000 shares of ABC Company"
  • Date of acquisition/buy
  • Date of sale
  • Cost of acquisition
  • Sale proceeds
  • Federal taxes withheld

The data from Form 1099-B helps the taxpayer to fill out Schedule D and Form 8949 if needed.

1099-NEC: If you have taken services from the people who are not treated as an employee (vendors, subcontractors, independent contractors, attorneys, accountants, directors or freelancers), you must issue a Form 1099-NEC to report their nonemployee compensation. This form is required for each person to whom you have paid at least $600 during the year. Payments made to a corporation are excluded from this reporting requirement. However, this form is required if you’re making payments toward the attorney fees to a corporation. Payments to individuals who are not reportable on the 1099-NEC form would typically be reported on Form 1099-MISC.

Nonemployee compensation can include:

  • Fees
  • Benefits
  • Commissions
  • Prizes and awards for services performed by a nonemployee
  • Other forms of compensation for services performed for your trade or business by an individual who is not your employee
  1. 1099-INT – If you’re a bank or a financial institution that had paid interest, you’re must issue a Form 1099-INT to the taxpayers who earn more than $10 interest income payments.

It is also requited foreach person:

  • For whom you withheld and paid any foreign tax on interest.
  • From whom you withheld (and did not refund) any federal income tax under the backup withholding rules regardless of the amount of the payment.

However, if you’re a life insurance company that paid interest on delayed death benefits or if the interest is related state or federal tax refund, the threshold is $600.

  1. 1099-DIV: Dividend and Distributions:

When no broker is involved – If you’re a corporation that issued dividends or made distributions, you must send a Form 1099-DIV to the shareholders by January 31 of the year following the close of the calendar year during which the distributions were made. You must also send Form 1099-DIV along with the Form 1096 to the IRS by February 28 of the year following the close of the calendar year during which the distributions were made.

When a broker is involved – If you’re a brokerage company, you must send a Form 1099-DIV to the investors who own shares of stocks or mutual funds.

It is necessary to file Form 1099-DIV with the IRS for each of the persons for whom you:

  • Paid dividends, including capital gain dividends, and other distributions on stock of $10 or more.
  • Withheld and paid any foreign tax on dividends and other distributions on stock.
  • Withheld any federal income tax on dividends under the backup withholding rules.
  • Paid at least $600 as part of a liquidation.
  1. 1099-K: Payment Card5 and Third-Party Network Transactions6:

If you’re a payment settlement entity (“PSE”), you’re required to report the following transactions:

  • Payments made in settlement of payment card transactions such as debit cards, credit cards, etc.
  • 7Payments made in settlement of third-party network transactions if the gross payment to the payee exceeds $20,000 and there are more than 200 transactions.

The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts.

It is the taxpayer’s responsibility to check the income reflected on the 1099-K received from the payer. If the information is incorrect, the taxpayer must reach out the issuer of the 1099-K. The IRS cannot correct it.

  1. 1099-MISC: The form is used to report all miscellaneous service payments that are not nonemployee compensation. The form will report payments like rents, prizes and awards. Payments made to a corporation are excluded from this reporting requirement except in case of payments for legal services.

Some payments include:

  • Rents of at least $600, not including rents paid to real estate agents.
  • Prizes and awards of at least $600. It should not be for the services received.
  • Royalty payments of at least $10.
  • Gross proceeds to an attorney of at least $600.

When are you not required to file the Form 1099?

You are not required to file information return(s) if (1) you are not engaged in a trade or business; or (2) if you are engaged in a trade or business and the payment was made to another business that is incorporated, but was not for medical or legal services, or the sum of all payments made to the person or unincorporated business is less than $600 in a tax year.

Failure-to-comply consequences

If you fail to ensure any of the below mentioned points, there is a requirement to withhold9 24%, or the applicable rate established by legislation, from the payments made to a U.S. person:

  • TIN8 is not provided in the proper manner.
  • IRS notifies that the TIN8 provided is incorrect.
  • There is an underreporting.
  • The payee has failed to certify that he or she is not subject to backup withholding.

1 Section 2102 of the Taxpayer First Act requires IRS to develop an internet portal by January 1, 2023, that allows taxpayers to electronically file all Forms 1099.

2A transmitter sends the electronic return data directly to the IRS. Electronic Return Originators (“EROs”) may apply to be Transmitters and transmit return data themselves, or they may contract with an accepted third-party transmitter to transmit the data.

3Taxpayer (recipient): Taxpayer refers to the person who is receiving the payments.

4Short Sale: A short sale is the sale of a stock that an investor think will decline in value in the future. To accomplish a short sale, a trader borrows stock on margin for a specified time and sells it when either the price is reached or the time expires.

5Payment Card Transactions: Payment card transaction means any transaction in which a payment card, or any account number or other identifying data associated with a payment card, is accepted as payment.

6Third-Party Network Transactions: Third-party network transaction means any transaction that is settled through a third-party payment network.

7The new rule where it was required to file the Form 1099-K in case the gross payment to the payee exceeds $600 even if there is a single transaction has been delayed by the IRS and is not applicable for the year 2022.

8 TIN: A Taxpayer Identification Number (“TIN”) is an identification number used by the Internal Revenue Service in the administration of tax laws.

9 There are situations when the payer is required to withhold at the current rate of 24%. This 24% tax is taken from any future payments to ensure the IRS receives the tax due on this income. Backup withholding is reported on Form 945, Annual Return of Withheld Federal Income Tax.

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Sahil Mehta

Sahil Mehta is a Tax Senior, in the firm and provides tax and consulting services.

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