Small businesses may need to file several kinds of 1099 forms to report payments made to businesses and individuals during the tax year. The two most common are Form 1099-NEC (for reporting payments to non-employees) and Form 1099-MISC (for reporting several different types of payments, including royalties and rents).
We’ll discuss when to file these two types of 1099 forms and the penalties for late filing.
- Businesses may need to file different types of information returns on 1099 forms to report payments.
- Two common types of information forms are 1099-NEC for payments to non-employees and 1099-MISC for miscellaneous types of payments.
- Penalties begin on the due date of the form and increase the longer they are overdue.
- Penalty amounts may be lower for small businesses than larger ones.
- To reduce penalties and interest, file 1099 forms as soon as possible.
Who Gets a Form 1099?
If your business makes payments to individuals and businesses during the year that are not employees, you may need to file a 1099 form to report these payments.
Starting with the 2020 tax year, the IRS separates the reporting of non-employee income out of Form 1099-MISC into a previously used Form 1099-NEC. It also changed the name of Form 1099-MISC from “Miscellaneous Income” to “Miscellaneous Information.”
Use Form 1099-NEC to report payments to non-employees for services rendered to your small business during the 2020 tax year or later. You must report these payments and send a copy of the form to payees if you paid them at least $600 for the year.
Use Form 1099-MISC to report a variety of payment types. Common types of payments by small businesses include:
- Prizes and awards
- Medical and health care payments
You must file Form 1099-MISC if you pay at least $10 in royalties, broker payments in lieu of dividends, or tax-exempt interest during the tax year at hand. For other types of payments, you must file this form if you make payments of $600 or more during the year.
Exception for Backup Withholding
For both forms 1099-MISC and 1099-NEC, you must report any federal income tax you withheld from payees under backup withholding rules. The IRS requires that payers withhold this tax in several circumstances.
You must report backup withholding for all payment amounts. For example, if you withheld taxes totaling $500 for the year from a payee whose income is reported on Form 1099-NEC, you must report the payment, even though it’s under the usual $600 minimum.
Exception for Payments to Attorneys
Payments to attorneys are a special case. If the payment is for fees paid for attorney services, use the 1099-NEC form. Report gross proceeds, such as escrow or claimants (but not for attorney services) on Form 1099-MISC. These payments are reportable if you paid at least $600 during the year.
1099 Filing Deadlines
There are two deadlines for each of these forms: one for giving the form to the payee and one for filing the form with the IRS. These due dates are for the year following the tax year. For example, the 1099 due dates for the 2021 tax year are in January and February of 2022.
Here are some specific deadlines to note:
|To send to most payees||Feb. 1||Feb. 1|
|To report to the IRS via mail||March 1||Feb. 1|
|To report to the IRS electronically||March 31||Feb. 1|
Deadlines for specific years may change if the date falls on a weekend or a holiday. The deadline then becomes the first business day after the original deadline.
1099 Late Filing and Reporting Penalties
Penalties for forms 1099-MISC and 1099-NEC apply to these forms and other types of information returns. Penalties apply for failing to file these reports with the IRS and failing to give the reports to payees.
In general, penalties are based on if or when you file, and they increase the later you file. Penalties are lower for small businesses, specifically those with $5 million or less in average annual gross receipts for the three most recent tax years.
Failing to File With the IRS
Penalties apply if you:
- Don’t file on time
- Don’t include all required information
- Don’t report the taxpayer ID number of the payee
- Don’t file machine-readable forms if they are available
- File on paper when you were required to file electronically
- Include incorrect information, such as a payee’s taxpayer ID number
The taxpayer ID number is the payee’s Social Security number, employer ID number, or another acceptable identification for tax purposes. Including the correct ID number is important, because this is how the IRS matches your form to the person’s reported income on their tax return.
The penalty that is required for a specific payee depends on when a correct return is filed, as shown below:
- If you filed correctly within 30 days (by March 30 if the due date is Feb. 28): $50 per information return with a maximum penalty of $571,000 a year (or $199,500 for small businesses)
- If you filed correctly more than 30 days after the due date but by Aug. 1: $100 with a maximum penalty of $1,713,000 a year (or $571,000 for small businesses)
- If you filed correctly after Aug. 1 or you don’t file the required return: $280 with a maximum penalty of $3,426,000 (or $1,152,000 for small businesses)
If the IRS finds that your failure to file a correct return is intentional, the penalty is at least $570 per information return with no maximum penalty.
While penalties apply for errors such as an incorrect taxpayer ID or incorrect dollar amounts, they don’t apply if you can show reasonable cause. This means the failure was beyond your control or due to significant mitigating factors. You must also be able to show your attempts to take steps to avoid the failure. Penalties also don’t apply for what the IRS calls “inconsequential errors,” which means any failure that does not prevent the IRS from processing the return. This can include matching the information required to be shown on the return with the information shown on the payee's tax return.
If you file 250 or more 1099 forms of any one type, you must file electronically. If you don’t file electronically, you may be penalized up to $280 per form unless you have a reasonable cause for not doing so.
Filing To Give Statements to Payees
The penalty for failing to provide statements to employees is separate from the penalties for failing to file with the IRS. But like the filing penalty, it’s also based on when you furnish the correct payee statement. The penalty is imposed if you:
- Don’t provide the statement by the due date
- Don’t include all required information
- Include incorrect information
Penalty for Failing To Report 1099 Income
If you receive a 1099-NEC or 1099-MISC form, you must report this income on your tax return. You can be penalized if you don’t report income due to careless, reckless, or intentional ignoring of the tax laws or if your failure to file a report results in a substantial underpayment of your taxes.
A “substantial underpayment” is 10% of the tax required to be shown on your tax return or $5,000, whichever is greater. The penalty is 20% of the amount that you failed to report.
Frequently Asked Questions (FAQs)
How much can you pay someone without having to file a 1099?
- Form 1099-NEC: report payments totaling $600 or more
- Royalties reported on Form 1099-MISC: report payments totaling $10 or more
- Most other 1099-MISC payees: report payments totaling $600 or more
You must also file Form 1099-NEC or Form 1099-NEC to report any amounts you withheld from federal income taxes for backup withholding based on IRS requirements. This is required even if the amount is under the minimum for that type of payment or payee for the year.
How do you correct a 1099 filing?
For errors in the payee’s name or tax ID number, write the IRS a letter including the type of error and all relevant information. The address is:
Internal Revenue Service Information Returns Branch
230 Murall Drive, Mail Stop 4360
Kearneysville, WV 25430
To correct a paper return after filing the form, file Copy A of the form with a revised Form 1096 to your state’s IRS Submission Processing Center. Give the payee information about the correction, too.
Can you add more 1099s after filing?
You can always send more 1099 forms after submitting the first batch. If you are filing on paper, include a new transmission Form 1096 with the totals for this second batch. If you are filing electronically, you don’t need Form 1096; just file using the IRS FIRE electronic filing system.