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How Do I File a 1099 for Vendors?

Freelancer coding software app.
Business vendor working remotely. (Photo by Faizur Rehman on Unsplash)

Businesses give vendors who worked with them 1099-NECs if they have paid the vendors US$600 or more during the fiscal year. The vendors who receive the 1099-NEC form are not employees of the business, and the business does not withhold federal or state taxes from the vendors’ payments. Consequently, the vendors are responsible for reporting their non-employee compensation and paying the federal and state taxes that are due upon receipt of the payments from their customers. 

Who Receives 1099-NEC Forms?

Image of 1099 FIRE Screen
1099 FIRE Screen (Photo from 1099 FIRE System)

1099-NEC forms are sent to contract workers who are freelancers, professional service providers, and vendors. Freelancing services include writing, marketing, graphic designers, photographers, and computer language coders. Professional service providers include accountants, consultants, tax advisors, and bookkeepers. As for vendors, service providers who receive them include caterers, repair personnel, and contractors. 

Vendors Who Do Not Receive 1099-NEC Forms

Tax filing forms.
Preparing tax forms. (Photo by Kelly Sikkema on Unsplash)

In 2020, the IRS changed the tax rules. Before 2020, vendors who earned more than US$20,000 would have been given a 1099-MISC form. However, from 2020 forward, vendors who have received US$600 or more for services performed, by law, must receive a 1099-NEC from the businesses that employed them.

There are some exceptions to the law:

  • vendor receives less than US$600 in payment
  • the service was provided by a C corporation
  • the service was provided by an S corporation
  • the service provider was a limited liability companies (LLCs) that have C or S corporation treatment 
  • the service provider was a lawyer
  • businesses that sell products, storage, freight, and other similar things.

They do not receive 1099-NEC forms for the following reasons:

  • Vendors who earn less than US$600 are not sent the forms because there is no legal requirement that they receive one.  
  • 1099-NEC forms are not needed by owners of C corporations, S corporations, LLCs with C or S corporation tax treatment because the income does not receive the same tax treatment as it does for sole proprietors and individual taxpayers.
  • Lawyers are sent 1099-MISC forms if they are paid more than US$600 during the year for professional services.
  • Businesses selling freight, storage, aquatic life, and other things in the performance of their trade or business are given a different tax treatment than non-employees (i.e., independent contractors). 

Third-Party Payment Processor Exception: 1099-K Forms

Businesses that use third-party payment processors (e.g., PayPal, Zenmo, CashApp) or credit/debit cards, are not required to file 1099-NECs with the IRS. Third-party payment processors file tax forms for the payments made to individuals and sole proprietors with the IRS for your business. 

Since 2022, credit companies and third-party payment processors have been required to file 1099-K forms with the IRS if they process payments of US$600 or more for self-employed people or sole proprietors. This requirement may cause some confusion for vendors if they receive a 1099-K and 1099-NEC at the end of the tax year. 

The potential confusion and/or chaos caused by the 1099-K form requirement can be caused by overreporting income. Income from the same business may be recorded twice if the vendor does not realize that the 1099-K and 1099-NEC are reporting earnings from the same customer/job. In addition, things can get messy if the two forms do not report the same income. 

1099-K forms must be reported to the IRS by February 28th of the following tax year if it’s a paper filing, and March 31st if it’s an electronic filing.

Reimbursement Providers

Reimbursement providers (e.g., Zenefits, Gusto, Justworks) often file 1099-NEC forms for businesses that use them as the primary or sole payment processors for their vendors. To be certain that this is done, businesses should check with their reimbursement providers to make sure that they provide this service and if there are any conditions (e.g., special payment processing fees) that must be met before the 1099 forms are sent to the business’ vendors.    

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Deadline for Filing the 1099 Forms 

1099-NEC forms must be filed with the IRS by January 31st of the following tax year. 1099-K forms must be reported to the IRS by February 28th of the following tax year if it’s a paper filing, and March 31st if it’s an electronic filing. If the forms are not filed by that date, then businesses can be charged a late filing fee ranging from US$50 to US$280 depending on how late the forms were filed with the IRS. 

Importance of the W-9 Form

W-9 forms are completed by vendors when they first begin working with a business. The W-9 lists the vendor’s name, address, and tax identification number. All three pieces of information are needed to complete the 1099-NEC and send it to the vendor.

Electronically Filing 1099-NEC Forms

The FIRE System

You can electronically file your vendors’ 1099-NEC forms with the IRS using the IRS Filing a Return Electronically (FIRE) System. To use this system, you must request a Transmitter Control Code (TCC) and submit the request at least one month before the tax filing deadline for your 1099 forms. The TCC is requested by completing and filing Form 4419 with the IRS. 

When your TCC is ready, the IRS will notify you, and you can then begin using your FIRE account. 

Accounting Software

If you don’t want to use the FIRE system, you can purchase tax accounting software that will allow you to fill out your forms via computer and submit them to the IRS. Some tax filing software that you may want to consider are QuikBooks, TurboTax, MHC Software, and CS Professional Suite.

Completing the 1099-NEC Form: Required Information

Man doing paperwork at a desk.
Man completing 1099 tax forms and supporting documentation. (Photo by Matthew Henry from Burst)

Before sitting down to complete the 1099-NEC forms for each of your vendors, you must compile the information that will be needed to fill out the forms.

The information needed by the business owner includes:

  1. Total amount of money paid to the vendor.
  2. Your company’s taxpayer identification number.
  3. Your company’s name and address.
  4. Vendor’s name.
  5. Vendor’s address.
  6. Federal income tax withheld during the year (if any).
  7. State income tax withheld during the year (if any).

Note, some business owners report federal and state tax withholdings for vendors because it makes it easier for vendors to file their tax returns with the IRS and state tax authorities. 

Sending Out The 1099-NEC Forms

After the 1099-NEC has been completed, you must send the correct copy of the forms to the right parties. To send out the correct forms to everyone who should get them, do the following:

  1. Copy A goes to the IRS.
  2. Copy B goes to the vendor.
  3. Copy C is kept for your business’ records.
  4. Copy 1 goes to the vendor’s state department of revenue.

Final Thoughts

If you think that you must, by law, file 1099-NEC forms for your vendors, check if they meet the filing requirements. If unsure, send the forms anyway. Failure to file required IRS tax forms can be very costly, especially if you have worked with numerous vendors throughout the year. 

On the other hand, if you don’t want to do it or have the time and/or expertise to do it, contact the Free Cash Flow (FCF) Agency to process the paperwork for you.

FCF has professional, experienced, and skilled personnel who can go through your records and file the appropriate tax forms for you. Contact FCF if you have questions or want some advice on how to file your vendor 1099 forms.

 

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