As the 1099 deadline  approaches on January 31, 2025 - staying compliant with IRS regulations is crucial in order to avoid steep penalties and/or disallowed expenses during an examination.  Below, we'll break down the most common types of 1099 forms, their requirements, who needs to get one, and how you can make the process stress-free going forward.

Types of 1099 Forms

• Form 1099-MISC - File form 1099-MISC if you've made the following payments during the year:
• At least $10 in:
• Royalties
• Broker payments in lieu of dividends or tax-exempt interest, or
• At least $600 in:
• Rents
• Prizes and awards
• Other income payments
• Medical and health care payments (paid in the ordinary course of business)
• Crop insurance proceeds
• Cash payments for fish or aquatic life purchased from a business (paid in the ordinary course of business)
• Payments to an attorney (if they are taxed as a Corporation)
• Fishing boat proceeds, or
• Direct Sales: Report direct sales of $5,000 or more of consumer products for resale anywhere other than a permanent retail establishment.
• Form 1099-NEC - File form 1099-NEC for non-employee compensation payments of $600 or more, including:
• Services performed by independent contractors (including parts and materials).
• Payments to attorneys (if they are NOT taxed as a Corporation or S Corporation)
• Form 1099-INT - File Form 1099-INT to report interest income payments exceeding $10 during the year.
• Form 1098 - While not a 1099, Form 1098 must be filed if your business receives $600 or more in mortgage interest from a borrower on any one mortgage during the year.

Who Needs a 1099?

Understanding who should receive a 1099 is essential to ensure accurate reporting and compliance. Not every payment requires a 1099, and certain entity types are exempt from receiving a 1099. Here's a quick guide to help you determine who should get a 1099:

• Entities That Should Receive a 1099
• Sole Proprietors: If you’ve paid a sole proprietor $600 or more for services, a 1099 is required.
• LLCs Taxed as Partnerships: Payments of $600 or more to LLCs taxed as partnerships should be reported via a 1099.
• LLCs Taxed as Sole Proprietors: Treat these as you would a sole proprietor—file a 1099 for payments of $600 or more.
• Medical and Legal Services: Regardless of entity type, payments for medical and legal services must be reported. This includes payments to corporations providing these services.  Generally, if the recipient is taxed as a corporation, report the payment on 1099-MISC.- not 1099-NEC.
• Entities That Do NOT Need a 1099
• Corporations (C Corps and S Corps): Payments made to corporations typically do not require a 1099, except for medical or legal services.
• LLCs Taxed as Corporations (C Corps and S Corps): These are treated as corporations and generally do not require a 1099, except for medical or legal services.
• Exceptions
• Payments made utilizing Third-Party Processors: Payments made via PayPal, Venmo, or similar platforms are handled by the processor. They issue 1099-K forms directly to the recipients.

Even if an entity typically doesn’t require a 1099, it’s still a good practice to collect a W-9 from all vendors and contractors. This ensures you have the correct information on file should circumstances change or additional filings be required. 

How do you know if an LLC is taxed as a partnership, corporation, s corporation, or a sole proprietorship (disregarded entity)? 

Ask them for a W-9 - this will tell you everything you need to know.

Pro Tip:  If you are paying a vendor or contractor with a check - provide the check only after they've provided you a completed W-9.  This will keep you from having vendors that refuse to give you the W-9 at reporting time because they don't want to be issued a 1099.

Additional Notes

Third-Party Processor Payments
Did you pay through platforms like PayPal or Venmo? As mentioned above - payments made utilizing these payment processors do not require 1099s -  these platforms generally issue 1099-K forms to the payment recipients. Just in case you end up making some payments by cash, check, or ACH - we still recommend collecting a W-9 from recipients for your records (but don't issue a 1099 for the amounts paid through the third-party processor). 

Mandatory E-Filing
If your business files ten (10) or more 1099s, W-2s, or similar information returns, you must file them electronically beginning with the 2024 tax year. This reduces paperwork and ensures compliance with IRS requirements.

How can I make getting this information together easier next year?

Apply these rules during the year.  Don't wait until reporting time to make sure you know who needs to get a 1099 and whether or not you have their W-9 on file.  Most accounting software packages allow you to tag vendors as 1099 recipients and store copies of their W-9.   If you're missing W-9s, get them now.  You are statutorily required to do backup withholding for vendors that refuse to provide you W-9s - either get the W-9 and issue the 1099 or find a new vendor.   Put together a process for your accounts payable team (even if its a team of only you), document that process (so new team members can understand it), and implement it.

"1099 'Employee'"

Your accountant (and your attorney and your insurance team)  want you to know - there is NO SUCH THING as a "1099 Employee".  You have either engaged a contractor or hired an employee. 

I'll say it a different way - 1099s are for independent contractors.  If you exercise full control over a person - you tell them what to do, how to do it,  when to do it, where to do it, they use your tools or equipment, they don't do any jobs for anyone else, and they are covered by your insurance policies, there is no logical way you can show they are an independent contractor.  You may have had them sign an agreement stating that they are an independent contractor, but form means nothing without substance.  If this sounds familiar, you might have some misclassification issues (or you're a tax accountant).  If you are unsure of how to classify someone - get with your CPA or EA.  They will assist you in putting together a process to make the classification determination and with how to document the process.  They will also help you with the next action items if you've previously misclassified an employee as an independent contractor. 

If you have a misclassified employee and they decide to file a couple of forms with the service to rectify the self-employment tax that they didn't expect to owe, you could be at risk for some major penalties - especially if you exempted them from benefit plans because of the misclassification.  It's in your best interest to be proactive, get ahead of it, and correct it now.  If you correct it before an examination occurs and are later assessed a penalty, your accountant may be able to highlight their engagement as a significant mitigating factor that helps get the penalty abated or reduced.

Should I have my CPA or EA issue my 1099s?

Honestly - probably not.  While we do prepare 1099s for a lot of our clients (if you are an active client and need help filing your 1099s please call Ramon!  He's happy to chat with you on getting them done!) - It's 2025 and filing a 1099 is a pretty mechanical act.   More of our clients file their 1099s in house than engage us.  There are a number of vendors on the market that can streamline 1099 reporting for a significantly lower cost than your tax professional can offer without sacrificing any value (we tell our clients to use Tax1099.com or the 1099 reporting module in their accounting software).  We do not get offended when our clients prepare their own 1099s - in fact, we encourage it.  If you're planning on doing your 1099s in house, but have a question - just ask your tax professional.  Will we bill a client that asks us to parse their entire vendor list, make determinations on who should be getting 1099s, calculate how much each one of the 1099 recipients were paid, and get those amounts back over to them so they can prepare their 1099s in-house?  Absolutely.  Yes.  For sure.  On the other hand - will we bill them for a one minute e-mail where they asked if ABC Attorney should be getting a 1099-NEC or a 1099-MISC?  Nope.  It's way too much work to bill for one minute of time.  I'm sure your accountant probably feels the same way. 

Final Thoughts

Don’t let 1099 season stress you out. Whether you need help filing or just have questions, we’re here to support you every step of the way.  If you don't have a tax professional on board, feel free to reach out to us to start a conversation about how we can help you!

For any questions or to learn more about our services, feel free to view our website at https://clintonwinklesllc.com or contact us by e-mail at clinton@clintonwinklesllc.com.