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What Small Business Owners Need to Know About Issuing 1099s

Jan 24, 2025

As a small business owner, staying compliant with tax requirements is an essential part of running your business smoothly. One area that often trips up entrepreneurs is the responsibility to issue 1099 forms. If you’ve paid independent contractors, vendors, or service providers during the year, there’s a good chance you’ll need to issue at least a few 1099s. But how do you know for sure? Let’s break it down.

Who Needs to Issue 1099s?

The IRS requires businesses to issue 1099 forms to report certain payments made to non-employees. Most commonly, this applies to independent contractors, freelancers, and other service providers who are not on your payroll. The key requirement is simple: if you paid someone $600 or more for their services during the tax year, you are generally required to issue a 1099.

For example:

  • Did you hire a freelance graphic designer to create your website? If you paid them $600 or more, you need to issue a 1099.
  • Did you pay a contractor to repair your office’s plumbing? That payment counts too.
  • Even something like hiring a social media manager, a consultant, or a photographer for your business can trigger the need to file.

What Payments Require 1099s?

It’s not just about contractors. Several types of payments require 1099 forms, depending on how and to whom the payment was made. Here are some common examples:

  1. Services Provided by Non-Employees
    Payments to individuals or businesses for services, such as:

    • Advertising services from a freelancer or marketing firm.
    • Repairs or maintenance performed by an independent contractor.
    • Professional services like legal consultations, accounting, or IT support.
  2. Rent Payments
    If you rent an office or other space from a landlord and paid them $600 or more during the year, you’ll need to issue a 1099-MISC for the rent payments—unless the landlord is a corporation.

  3. Attorney Fees
    Payments to attorneys are a special case. Even if the attorney’s business is incorporated, you must issue a 1099 if you paid $600 or more for their legal services.

  4. Prizes and Awards
    If your business awarded prizes or other taxable awards totaling $600 or more, those recipients should also receive a 1099.

  5. Non-Employee Compensation
    This includes anyone you hired to perform work for your business who is not an employee. Think delivery drivers, event coordinators, or even musicians hired for an event.

Exceptions to the Rule

While the $600 threshold is a good general rule of thumb, there are some notable exceptions:

  • Payments made to corporations generally do not require 1099 forms, except for attorney fees and a few other specialized cases.
  • Payments made electronically (e.g., through credit cards or PayPal) do not require a 1099 from the business. These payments are instead reported by the payment processor on a 1099-K.

It’s also important to note that employee wages reported on a W-2 are not subject to 1099 reporting. If someone works for you as an employee, their compensation is handled differently.

Why Compliance Matters

Failing to issue 1099s can result in significant penalties from the IRS. These penalties can range from $50 to $290 per form, depending on how late the form is filed—or even higher if the IRS determines the omission was intentional. Beyond the financial risk, ignoring your 1099 obligations can create headaches down the line, especially if the IRS flags your business for non-compliance.

Final Thoughts

For small business owners, issuing 1099s is a key part of tax compliance. By understanding the requirements and keeping good records throughout the year, you can avoid costly penalties and ensure your business stays in good standing.

If you’re unsure about whether your payments require a 1099, it’s always a good idea to consult with a tax professional. Staying on top of your reporting requirements isn’t just about following the rules—it’s about building a strong foundation for your business’s success.

If you want to improve your business situation, get assistance now. Schedule your free consultation today or give us a call at (218) 491-4002. We're here to help!

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