As the IRS ramps up its agent hiring, we will see more enforcement action by the IRS, even on matters that most of us find trifling such as 1099 form filings. Below is a quick 1099 and W9 form guide everyone should keep by their desk, followed by best practices for collecting information needed for them, backup withholding tax review, and penalties for noncompliance.
Types of 1099 Forms
| Form | Use |
| Form 1099-NEC | Used to report payments of $600 or more to non-employees like independent contractors, freelancers, and vendors. This is the most common form used for reporting payments that aren’t salary or wage-based. |
| Form 1099-MISC | Utilized for reporting various other types of payments over $600 including rents, prizes, awards, other income payments, and payments to attorneys. (Have you given out freebies or awards to users worth over $600? File this.) |
| Form 1099-DIV | Reports dividends and other distributions to investors, including $10 or more in dividends and stock distributions from a business or a mutual fund. (This is often overlooked by businesses but very relevant to businesses making distributions.) |
| Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) | Reports the sale of stocks, bonds, mutual funds, and other securities through a brokerage or barter exchange. (Not currently required for crypto brokers.) |
| Form 1099-K (Payment Card and Third Party Network Transactions) | Reports payments processed by payment settlement entities, either by card transactions or through third-party networks. (Are you a marketplace? You probably need to file this.) |
| Form 1099-DA (Digital Assets) | Starting in 2025, cryptocurrency brokers will be required to report to users their capital gains and losses on disposal of digital assets on this form |
| Form 1099-R | Reports distributions from pensions, annuities, retirement plans, IRAs, or insurance contracts. |
| Form 1099-SA (Distributions from an HSA, Archer MSA, or Medicare Advantage MSA) | Reports distributions from health savings accounts, Archer Medical Savings Accounts, or Medicare Advantage MSAs. |
| Form 1099-LTC (Long Term Care and Accelerated Death Benefit) | Reports payments under long-term care insurance contracts and accelerated death benefits. |
| Form 1099-S (Proceeds from Real Estate Transactions) | Reports proceeds from real estate transactions or property sales. (This is usually file by title companies.) |
| Form 1099-C (Cancellation of Debt) | Reports cancellation of debt of $600 or more by a financial institution or government entity. |
| Form 1099-INT | Reports interest income of $10 or more from banks and other financial institutions. (Unless you are a financial institution, this doesn’t apply.) |
| Form 1099-G (Certain Government Payments | Used to report unemployment compensation, state and local income tax refunds, agricultural payments, and other government payments. (Not issued by private businesses.) |
Do You Have To Withhold Taxes from Vendors?
1099s are issued by January 31st of every year so that the IRS can double check if recipients of the payments are reporting their income properly, it’s part of the checks and balances system. Some recipients are harder to catch than others. Because of that, before making payments to vendors and/or investors, IRS requires that you determine whether you are obligated to withhold taxes from the payments that might otherwise go unreported and remit the taxes directly to the IRS. This forces the risky recipients to file tax forms to try and get a refund, ensuring compliance. This is what backup withholding taxes are.
How do you determine if you have to withhold taxes and where do you get the information needed to fill out 1099 forms? Form W-9 helps businesses obtain information needed for 1099 forms, but it also helps to determine if backup withholding is needed. Backup withholding is required if:
- The vendor does not provide a TIN on form W9, or
- If the IRS notifies you that the
- TIN provided is incorrect, or
- The vendor did not report all interest/dividend income, or
- The vendor failed to certify that he is exempt from backup withholding on his W9 form.
The current withholding tax rate is 24% – this amount must be held back from the payment/distribution you are making to the vendor/investor. Then, it must be remitted to the IRS or they will come after you for total not withheld and you will have to pay it out of pocket (YOU HEARD ME, OUT OF POCKET, plus interest and penalties). Businesses must report and remit any amounts withheld using Form 945, “Annual Return of Withheld Federal Income Tax.”
Best Practices for W9 Collection
- Collect W-9 Forms Promptly: Obtain a completed Form W-9 from every new contractor or vendor before any payments are made to secure their taxpayer information, including their tax identification number (TIN), which is critical for accurate 1099 filings.
- For Foreign Vendors, Use Form W-8BEN: When dealing with foreign vendors, collect Form W-8BEN to obtain necessary information and to determine their U.S. tax withholding obligations. In most cases, you just hold it in storage in case IRS shows up so you can prove no withholding was required.
- Integrate W-9 Information into Accounting Software: Adding W-9 details into your accounting software like Quickbooks saves you a lot of time. Most software allow you to tag vendors as subject to 1099, input their address and TIN and then generate 1099s. There are also separate software that focus on 1099 forms, they integrate with accounting software, allow you to send invitations to new vendors to collect W9 information electronically, store this data, and then pull payment totals from accounting software into 1099 forms. It’s 2024, let’s be efficient.
- Attach Payments to Vendors in Software: Accurately record your payments and assign each to a vendor profile within your accounting software. This simplifies the process of reporting by vendor and helps to maintain organized records. If half your payments are not attached to vendor names, you won’t be able to easily report on spending by vendor, which you need to do to fill out 1099 forms.
- Collecting Investor Information: For issuing Form 1099-DIV, systematically collect and update investor information, ensuring that records reflect current addresses and taxpayer details to facilitate correct distributions reporting.
- KYC Users/Customers: For brokers, exchanges and marketplaces the 1099 process is onerous due to the volume of users/customers. Require user/customer details to be collected electronically before they are allowed to transact on your platform. Since many such entities are required to also have a KYC (know your customer) process, it is efficient to incorporate W9 collection into the KYC process.
Penalties for Non-Compliance
- Late Filings: Failing to file a correct 1099 form by the due date can attract penalties ranging from $50 to $280 per form, depending on the delay’s extent.
- Intentional Disregard: If found to be intentionally disregarding filing requirements, the penalty is at least $570 per form, with no cap.
- Incorrect Information: A penalty of $280 per form is levied for incorrect information unless promptly corrected.
- Failure to Request W-9s: Neglecting to solicit W-9 forms from vendors and contractors can result in penalties, although no specific penalties have been published. This oversight impedes a business’s ability to comply with backup withholding requirements and to accurately report tax obligations.
To recap: (a) collect W9s before making payments, (b) establish whether backup withholding applies, (c) withhold taxes or make full payments to recipients, (d) file applicable 1099 forms after year ends. Do not wait for year end to contact your vendors for these forms.