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What Is a 1099 and When Is It Required?

  • Writer: Miranda Kishel
    Miranda Kishel
  • Oct 15
  • 2 min read
1099

1099 Definition


A 1099 is a tax form the IRS uses to track certain types of income that are not from wages, salaries, or tips. In the context of small businesses, the most common is the Form 1099-NEC, which reports payments made to independent contractors (also called 1099 contractors). If you hire freelancers, consultants, or other non-employees, you may be required to issue them a 1099 so the IRS knows how much income they earned from you.


Why It Matters to Small Business Owners


For small business owners, staying on top of 1099 requirements is a key part of IRS compliance. Missing or mishandling 1099 forms can result in:


  • Penalties and fines for late or incorrect filings

  • Increased audit risk if the IRS notices mismatched records

  • Strained contractor relationships if payments are reported incorrectly

In short: 1099s help protect your business by ensuring your reporting matches what your contractors report on their own tax returns.


Common Examples or Use Cases


You may need to issue a 1099 if:


  • You pay an independent contractor (not an employee) $600 or more in a year for services.

  • You hire a freelance graphic designer, bookkeeper, or consultant to help with your business.

  • You pay rent or certain other business-related expenses through a landlord or management company.

  • You work with lawyers (even corporations) — legal fees often require reporting on a 1099.

Employees, on the other hand, receive a W-2 instead of a 1099, since payroll taxes are withheld.


Related Terms or Misconceptions


  • Independent Contractor vs. Employee: Employees get W-2s, while contractors get 1099s. The IRS has strict rules about classification. Misclassifying workers can be costly.

  • 1099-NEC vs. 1099-MISC: The 1099-NEC (Nonemployee Compensation) is now the standard for reporting contractor payments. The 1099-MISC is used for other payments like rent or royalties.

  • Threshold Misunderstanding: Some business owners mistakenly think any contractor payment needs a 1099. In fact, the $600 annual threshold applies in most cases.

For full details, see the IRS guidelines on Form 1099-NEC.


Tips for Applying This Concept in a Real Business


Here are some practical steps to simplify 1099 compliance:


  • Collect W-9s upfront: Always request a completed Form W-9 from contractors before paying them. This ensures you have the right legal name and taxpayer ID.

  • Track payments carefully: Use bookkeeping software to tag contractor payments separately from employee wages.

  • Review vendor types: Not every vendor requires a 1099 — payments made by credit card or PayPal are reported separately by the payment processor.

  • Set reminders: 1099 forms are due to contractors by January 31st each year, with IRS filing deadlines following shortly after.

  • Work with your payroll provider: Many payroll and accounting systems can automatically generate and file 1099s for you.

Learn more about handling payroll and compliance in Development Theory's Payroll Services Guide.


Final Takeaway


1099s may seem like just another form, but they play a big role in keeping your business compliant and your contractor relationships smooth. By understanding when they’re required and setting up simple systems to track payments, you’ll avoid IRS headaches and maintain clean financial records.

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