If you’re an e-commerce business owner, you need to know about Form 1099-MISC. More importantly, you also need to be aware of the differences between 1099-MISC and 1099-NEC. While you may have used 1099-MISC in the past for certain payouts, you’ll likely need to file 1099-NEC forms instead depending on your business. Taxes can be complicated and dealing with these forms is never an enjoyable process, but it’s important to understand how to file these properly.
We’ve put together an ultimate guide for Form 1099-MISC so you have everything you need to know. From understanding who needs to file to filing deadlines, we’ll explain everything you need to know about these tax documents. With this guide, you’ll be ready to file your Form 1099-MISC and 1099-NEC just in time for tax season.
If you want to automate this part of the tax filing process and take out the guesswork, make sure to schedule a demo with Dots. In the meantime, read on for our ultimate guide.
What is a 1099-MISC Form?
A Form 1099-MISC is a form from the Internal Revenue Service (IRS) which is used to report miscellaneous income that is earned by a business or individual during the tax year. A 1099-NEC form, on the other hand, is used for reporting non-employee compensation such as independent contractors, gig workers, and freelancers. While the 1099-MISC was previously used for these workers, the IRS has changed this.
Of course, if you’re an e-commerce business that only employs salaried employees, you won’t have to worry about these forms. But many e-commerce businesses utilize independent contractor services, in which case, this guide would be relevant.
When is it Due?
The filing deadlines differ based on which 1099 form you’re filing. Businesses need to send out 1099-NEC forms to any payees who received payments in the previous calendar year that meet the 1099-NEC requirements. For example, if you made payments to independent contractors in 2022, you will need to provide them with a 1099-NEC by January 31, 2023. If January 31 of the calendar year doesn’t fall on a business day, the due date is pushed to the following day.
Businesses must submit 1099-MISC forms by February 28 if they are filing by paper or March 31 if they are filing electronically. Again, if the dates don’t fall on a business day the due date will be pushed to the nearest following business day.
Paper forms need to be postmarked by the due date, and electronic forms can be submitted instantly. Remember, if you miss the deadlines for filing, you may be subject to fines and penalties. It’s best to make sure to fill out all of your relevant tax forms on time. Also, make sure to check your forms for accuracy so you can avoid any issues or the need to resubmit forms due to errors.
Who Needs One?
There are various different individuals and businesses that will need to fill out a 1099-MISC or 1099-NEC form for the tax year. If you’re an e-commerce business that pays out more than $600 to independent contractors, freelancers, professional service providers, external vendors, renters, gig workers, or any other non-employee you will need to send out 1099 forms and submit copies to the IRS. There are some other instances where you may need to submit a 1099-MISC or 1099-NEC, which we’ll cover in the next section.
Generally, if you didn’t pay any non-employee more than $600, you are not obligated to issue these forms, and you can continue to file your taxes as normal. With that being said, let’s take a look at the types of payments that the IRS outlines for businesses that need to submit 1099 forms.
Types of Payments to Include
According to the IRS 1099 rules, businesses are required to report payments of $600 or more for specified types of income and other payments. It’s important to be familiar with these payment types so you know if these 1099 forms apply to your e-commerce business. You want to make sure you’re as accurate as possible and compliant with the IRS, so you can avoid hefty penalties and fines.
Let’s take a look at all of the types of payments the IRS lays out for Form 1099-MISC. You will need to submit Form 1099-MISC if you’ve paid out:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- At least $600 in:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
- Payments to an attorney.
- Any fishing boat proceeds
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
One thing to notice is that these are different requirements from what was listed on Form 1099-MISC before 2020. Now, many of the payments reported on 1099-MISC before 2020 are reported on Form 1099-NEC instead.
You should be filing Form 1099-NEC, Nonemployee Compensation, to any individuals or businesses that you have paid during the year under these stipulations laid out by the IRS:
- At least $600 in:
- Services performed by someone who is not your employee (including parts and materials) (box 1); or
- Payments to an attorney (box 1).
File Form 1099-NEC or Form 1099-MISC to report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale.
If you have any questions about which of these forms to file, it’s always best to check with your accountant and ensure you’re filing the right forms. It’s best to be careful, so you don’t have to deal with fines.
Instructions for Filing
Both 1099-MISC forms and 1099-NEC forms can be filed either electronically or by paper. If you’re electronic filing, you can find these forms on the IRS. The IRS provides tools for e-filing your 1099 forms. This is usually a more convenient process, especially if you’re filing multiple forms. However, keep in mind that you will need to register to e-file with the IRS. This registration must be done at least 30 days before the 1099 due dates to be registered in time.
If you’re filing your 1099 forms by paper, you will need to order hard copies from the IRS and send them out to your contractors. You will need to mail the forms along with any necessary documents to the IRS by the mailing due dates. Make sure to check the box to indicate you’ll be filing by mail.
Regardless of how you file, you’ll need to have several copies of your 1099 forms. These copies are for the IRS, payees and your own records. Here’s how to file each copy:
- Send Copy A to the IRS
- Send Copy 1 to the state tax department
- Send Copy B and Copy 2 to payees, this allows them to use them for their own filing purposes
- Keep Copy C for your records
There are also certain scenarios where you must file your 1099s electronically. If you have 250 or more forms to file, you must file them electronically. Generally, e-filing is simpler so it may be worth doing this anyway.
Also, remember that you will need W-9 forms before you can put together your 1099 forms. W-9 forms collect identifying information for contractors and freelancers, functioning similarly to the W-4 form collected for salaried employees.
If you’re unsure if you should be filing your 1099s electronically, you can always consult your accountant or tax advisor for additional guidance.
What are the penalties for not filing Form 1099-MISC?
If you’re an e-commerce business that is required to submit 1099 forms and you fail to do so, you can face steep fines and penalties. The IRS penalties for late, misfiled, missing, or inaccurate 1099 forms can quickly add up and cost a business a lot of money. In addition, businesses may face criminal penalties if they purposely engage in fraudulent tax activity.
With that in mind, let’s take a look at some of the penalties that the IRS outlines for 1099 forms that are filed incorrectly:
- $50 for every return if you correctly file within 30 days of the due date. The maximum penalty for these fines is up to $588,500 per year with a maximum penalty of $206,000 for small businesses
- $110 for every return if you correctly file within 30 days after the due date, by August 1. The maximum penalty for these fines is up to $1,766,000 per year with a maximum penalty of $588,500 for small businesses
- $290 for every return if you correctly file after August 1 or if the returns aren’t filed. The maximum penalty for these fines is up to $3,532,500 per year with a maximum penalty of $1,177,500 for small businesses
These penalties are based on filing the correct information. If there are corrections needed and the proper corrections aren’t filed, the penalty is $290 for every form.
If you’re wondering if you fall under the small business category, the IRS defines a small business or self-employment as follows: If the filer's average annual gross receipts for the three most recent taxable years do not exceed $5,000,000, the maximum penalty in each of the three penalty categories will be reduced.
With that being said, it’s in your best interest to avoid these penalties altogether by filing these forms on time and filing them accurately. Along with being beneficial for your business financially, it helps keep things organized,and prevents any payment problems with the contractors you work with.
If you do happen to misfile your 1099 forms, it’s good to be familiar with the process for filing a correction.
How to File a Correction
While it’s never ideal to need to file corrections, mistakes happen. If this is the case, you’ll need to file a new 1099 form and check the ‘Corrected’ box to indicate that you’re re-submitting the form to make corrections.
If you filed electronically, the process is a bit more complicated as you’ll need to submit the corrected forms via paper. You follow the same process, but you’ll also need to complete Form 1096 to summarize your tax form submissions. While this can be a frustrating extra step for e-filers, it’s necessary to make the adjustments and avoid penalties.
While avoiding penalties and understanding the 1099 process can be complicated, it doesn’t have to be. Dots can help automate your tax processes for independent contractors and make things much simpler.
Make Payouts Easy With the Dots API
If you’re an e-commerce marketplace that makes payouts to independent contractors and sellers, make taxIf you’re an e-commerce marketplace that makes payouts to independent contractors and sellers, make tax compliance and reporting easier with the Dots API. Dots can integrate with your current payout infrastructure in minutes, allowing you to offer your contractors multiple payout options while also collecting and generating their 1099 forms for you.
Not only will your contractors enjoy having more ways to get paid, but you won’t have to go through the arduous process of manually collecting and generating their tax forms. Dots takes care of everything, so you’re ready for tax season. Dots also allows businesses to make payouts to international contractors, taking care of the tax and compliance processes for paying them as well. In short, Dots is the best solution for making your payout process frictionless and stress-free. Ready to learn more? Schedule your demo with Dots today to see how it can help your business.