1099s: Everything Contractors Need to Know

Who Gets a 1099: Understanding the Recipients

The question “Who gets a 1099?” is fundamental for business owners in the construction and trades industries. Here’s a breakdown of who should receive one:

1. 1. Independent contractors or subcontractors who have performed $600 or more worth of work for you in a year. This also includes janitorial/cleaning expenses, referral fees you paid out, IT service provider, marketing provider, etc.
   2. Individuals or businesses to whom you’ve paid rent of $600 or more (e.g., for equipment or storage space).
   3. If you paid a subcontractor for labor and materials, both the labor AND materials must be included in the total amount of the 1099.
   4. Attorneys, regardless of entity type, who have provided legal services totaling $600 or more.
   5. Members of LLCs that are not taxed as corporations, if payments to them exceed $600.

It’s important to note that employees do not receive 1099s; they receive W-2 forms instead. This distinction is crucial for proper tax reporting and compliance.

When Are 1099s Due: Important Deadlines

Understanding the deadlines for 1099 forms is critical to avoid penalties. The question “When are 1099s due?” has a multi-part answer:

1. For 1099-NEC: January 31st: This is the deadline to send 1099 forms to your contractors and to the IRS. For example, for work done in 2023, you need to send out 1099s by January 31, 2024.
2. For 1099-MISC: 

• • January 31st: Deadline to send 1099’s to recipients. 
  • February 28th: If you’re filing paper forms with the IRS, this is your submission deadline.
  • March 31st: This is the deadline for e-filing 1099-MISC with the IRS. E-filing is generally recommended for its efficiency and accuracy.

Missing these deadlines can result in penalties, so it’s crucial to mark these dates in your calendar and prepare well in advance.

How a 1099 Works: The Process Explained

Understanding how these tax forms work is essential for proper financial reporting. Here’s a step-by-step explanation of the process:

1. You pay a contractor $600 or more during the tax year.
2. You fill out a 1099 form, reporting the amount paid to the subcontractor.
3. You send one copy of the form to the subcontractor and another to the IRS.
4. The subcontractor uses this information to report their income on their tax return.
5. The IRS compares the information you submitted with what the subcontractor reports to ensure accuracy.

This process helps maintain transparency in financial transactions and ensures proper reporting of income.

Types of 1099 Forms: Know the Differences

While there are several types of 1099 forms, contractors and construction business owners typically deal with a few specific ones:

1.  

1. 1. Form 1099-NEC (Non-Employee Compensation): This is the most common form for paying independent contractors.
   2. Form 1099-MISC: Used for rent payments, attorney fees, and other miscellaneous payments.
   3. Form 1099-INT: For reporting interest payments.
   4. Form 1099-DIV: For reporting dividend payments.Understanding which form to use for different types of payments is crucial for accurate reporting.  

Gathering Necessary Information

Before filling out these forms, you need to collect specific information from your contractors. Your subcontractors should fill out a W-9 each year:

• Legal name
• Address
• Taxpayer Identification Number (TIN) or Social Security Number

All of your subcontractors should fill out a W-9 form before you EVER pay them. This ensures you have all the necessary information on file when it’s time to prepare. If you’d like an easy way to keep track of your subcontractors information, download our subcontractor packet here.

Consequences of Non-Compliance

Failing to file 1099s or filing them incorrectly can lead to significant penalties:

• Penalties can range from $50 to $270 per form, depending on how late the filing is.
• For intentional disregard, penalties can increase to $550 per form or 10% of the amount that should have been reported, whichever is greater.

These potential costs underscore the importance of timely and accurate filing.

Tips for Staying Organized

To manage reporting effectively:

1. 1. Maintain detailed records of all payments to contractors throughout the year.
   2. Utilize accounting software designed for small businesses and contractors.
   3. Set reminders for important tax dates.
   4. Consider engaging a professional accountant or tax preparer for complex situations. At Level Accounting, we help our clients keep track of their subcontractors W9’s, payments & other vital information and file for our clients, so you don’t have to worry about a thing.

If you want our checklist to simplify collecting important information from each of your subcontractors, download our subcontractor packet and make this process easy. 

Conclusion: Mastering 1099 Compliance

Understanding tax forms is a critical skill for any contractor or business owner in the trades and construction industry. Knowing who gets one, when they’re are due, and how they work are essential pieces of knowledge that contribute to your business’s financial health and compliance.

By staying informed about subcontractor and tax requirements and implementing good record-keeping practices, you can ensure that this aspect of your business operations runs smoothly. While it may not be the most exciting part of running your business, proper tax form management is crucial for long-term success and avoiding unnecessary complications with the IRS.

Take the time to familiarize yourself with these processes, set up systems to track necessary information, and don’t hesitate to seek professional help if needed. With the right approach, managing your tax obligations can become a routine part of your business operations, allowing you to focus on what you do best in the trades and construction industry.