Understanding IRS Form 1099

 

Managing various financial forms and documents is crucial for lawyers and individuals. One vital form is IRS Form 1099. Whether you’re a lawyer filling out a 1099 form or an individual receiving it, understanding the different types of Form 1099 and their criteria can help you remain compliant in your tax reporting.

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Why Form 1099 is important

Not all income is considered regular income, meaning income from an employer to an employee. Form 1099 enables the IRS to track income that isn’t captured through regular payroll reporting. This ensures those who owe income tax on non-regular income still pay what they owe.

Common types of Form 1099

Form 1099 is actually a series of forms. The exact form that is filled out depends on where the income comes from–or the relationship that led to that income. For example:

• Form 1099-NEC is for freelance income (non-employee compensation, such as independent contractors and other self-employed individuals)
• Form 1099-INT is for interest earned from a bank or other financial institution
• Form 1099-DIV is for dividends and distributions
• Form 1099-MISC is a miscellaneous category to report payments made to individuals for services such as rent, royalties, and other payments that don’t fall under the categories of wages, salaries, or tips
• Form 1099-K is for payment card and third-party network transactions
• Form 1099-R is used for distributions from pensions, retirement or profit-sharing plans, annuities, IRAs and insurance contracts
• Form 1099-B is for proceeds from broker and barter exchange transactions.

When to issue Form 1099

As a lawyer, you may have to issue Form 1099. This is because there are various consultants, witnesses, and support services you may access while helping clients or running your practice.

Here are some situations where lawyers issue Form 1099:

• If you pay for independent legal support services (that is, they are not regular employees) and you pay more than $600 in a calendar year to any single provider, you would issue that provider a 1099-NEC. For example, you might have to hire paralegals, process services, or private investigators. You may also have to hire expert witnesses, researchers, or legal consultants.
• If you pay for independent services that are not related to legal support, such as landscapers, cleaning services, and contract labor, you will provide a 1099-NEC.
• Additionally, if you pay rent of more than $600 in a calendar year, you’ll have to send your landlord or property management company a Form 1099-MISC.

There are many tax, business, and legal forms to stay on top of. Clio’s Common Legal Forms Hub helps you keep track of the forms you use for your practice or to help your clients. 

When not to issue Form 1099

There are still some scenarios where you don’t issue a Form 1099. These include:

• To corporations: S Corporations and C Corporations do not require 1099s.
• To employees: Form 1099 is for non-regular income, which excludes employees. Employees receive a W-2 Form.
• For contractors who are paid via payroll provider: In these cases, the payroll provider sends the 1099s directly, so you aren’t responsible for issuing one, although it’s always a good idea to confirm this with your payroll provider.

Who receives Form 1099?

Individuals or entities that have received income from sources that are not considered regular employment are sent 1099 forms. This includes:

• Independent contractors and freelancers who earn more than $600 in a calendar year receive Form 1099-NEC
• Landlords or businesses that receive more than $600 in rental income receive Form 1099-MISC
• Investors who obtain interest income, dividends, or distributions will receive a 1099 Form
• Individuals who receive certain government payments, such as state tax refunds receive Form 1099-G
• Retirees and beneficiaries who receive distributions from pensions, annuities, retirement plans or similar funds receive Form 1099-R
• Anyone receiving miscellaneous income such as prizes, awards, or legal settlements of more than $600 receives Form 1099-MISC
• People who sold real estate receive Form 1099-S
• People who have their debts canceled or forgiven receive Form 1099-C

Criteria for receiving Form 1099

Whether a Form 1099 must be sent depends on the specific form. For most 1099 forms, the individual must have received $600 or more in compensation, payments, or proceeds. However, Form 1099-MISC must be sent if royalties result in payments of $10 or more. Form 1099-DIV is sent when the individual or entity receives $10 or more in dividends or distributions. Certain government payments of $10 or more must also be reflected in a 1099 form.

Lawyers will often receive Form 1099-MISC for a variety of reasons. You’ll receive the form if you provide legal services as an independent contractor. For example, if you provide legal consulting services to a business as a contractor, the business will issue a Form 1099-NEC to you to report the payment.

You’ll also receive a Form 1099-MISC if you receive settlement payments on behalf of a client. The entity that makes the payments issues the form to you to report the gross amount paid. If settlements are paid jointly, you and your client will both sometimes receive the form for the full amount, however, gross proceeds don’t count as income.

When you send your client the settlement, you may not be required to send a Form 1099 to the client since the defendant who paid the settlement is required to send the form. It’s important to be aware of situations where you are considered the payer or someone else is.

Examples of when Form 1099 is issued

There are many scenarios where Form 1099 would be issued:

• Sarah sells a piece of real estate property for $250,000. The title company handling the transaction issues Form 1099-S to Sarah, to report the $250,000 in gross proceeds from the sale.
• John has a savings account that earns $100 in interest over the course of a year. The bank issues Form 1099-INT to John to report his $100 in interest income.
• Law firm Smith & Associates hires a freelance investigator, Jane, to gather evidence for a case. Over the course of a year, Smith & Associates pays Jane $5,000 for her services. At the end of the year, the law firm issues Form 1099-NEC to Jane to report the $5,000 they paid her.

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Understanding the implications of receiving Form 1099

If you have received an IRS Form 1099, this means you have earned income that doesn’t fall under the category of regular income. You may have earned self-employment income, interest from investments, or other income.

The income stated on the form must be reported to the IRS as income, even if you will not owe taxes on it. The IRS takes the information from your W-2 forms (if you have them) and your Form 1099 and compares them against your tax returns or other tax forms. If the amounts don’t match, you could wind up owing more money, and being charged penalties.

When should I expect to receive Form 1099?

The good news about Form 1099 is the payer fills it out and sends a copy to you and one to the IRS. The IRS then matches the Social Security Number or taxpayer identification number on the form with your income. They expect when you file your taxes, you will report the income from this form on your income taxes.

Most payers send Form 1099 by January 31 or February 15 the year after the income was earned, depending on the type of 1099 you should have received. So if you earned income in April 2024, you’ll receive your Form 1099 in early 2025.

If you haven’t received a Form 1099 by mid-February and you were expecting one because you earned non-regular income, first try contacting the payer to have them send you the form. You can also contact the IRS for help if you’re having difficulty obtaining the paperwork.

What if I notice an error on my IRS Form 1099?

If you’ve noticed an error on your form, reach out to the payer as soon as possible and alert them to the mistake. If they’ve sent the form to you before they sent it to the IRS, they may be able to correct the error before sending the IRS a copy.

If they’ve already sent the incorrect information to the IRS, they’ll need to file a corrected 1099 and issue that to both you and the IRS.

If you believe there is an error on your Form 1099 and can’t get a corrected version from the payor, put in the amount you believe is correct and include an explanation for the discrepancy for the IRS.

Do I need Form 1099 to file my taxes?

Not everyone needs a Form 1099 to file their taxes. You need this form if you earned non-regular income, such as freelance income, investment income, prizes above a certain amount or any other income covered by the 1099 categories. If you haven’t received such income, you don’t need a Form 1099 to file your taxes.

If you have received such income, you have a responsibility to report it even if the payer hasn’t issued you a Form 1099. They may still have submitted it to the IRS, and the IRS is expecting you to report that income.

Filing requirements for Form 1099

What are things I need to know when filing a Form 1099?

Deadlines and penalties for non-compliance

Failure to file correct forms can result in financial penalties, which vary based on the length of the delay. Failure to file the correct information returns or to provide correct payee statements results in a penalty of

• $60 per statement if filed within 30 days of the due date (to a maximum of $206,000 for small businesses)
• $120 per statement if corrected after 30 days but by August 1 (to a maximum of $588,500 for small businesses)
• $310 per statement if corrected after August 1 or not corrected at all (to a maximum of $1,177,500 for small businesses)

If you show an intentional disregard of filing requirements, you could be penalized at least $630 per form, with no maximum limit.

The penalties for not reporting Form 1099 income could result in a penalty equal to 20% of your underpayment. For example, if you failed to report $2,000 of income, your penalty could be $400 ($2000 X .20 = $400).

Tips for accurate and timely filing

The best way to ensure your taxes are filed properly and on time is to keep accurate records throughout the year. This ensures you know how much to report even if you don’t receive an accurate 1099 by the deadline.

If you haven’t received your IRS Form 1099 by February 15, contact the payor to let them know and ask them to resend it.

Important considerations for Form 1099

What should I need to keep in mind when working with Form 1099?

Differences between Form 1099 and W-2

The main difference between IRS Form 1099 and a W-2 form is who it’s for. The 1099 form is for independent contractors and non-regular income. It’s used by the individual to report and file their payroll taxes, which are sent to the IRS. A W-2 form is issued by employers to full-time and part-time employees. In such cases, payroll taxes are deducted from the individual’s paycheck.

Business owners aren’t responsible for withholding taxes from 1099 contractors–it’s entirely on the contractor to report and pay their taxes. Employers are responsible for withholding taxes from W-2 employees, who receive a regular wage and benefits.

Differences between Form 1099 and Form 1040

Form 1099 is used to report miscellaneous income from a variety of non-regular employment sources. Form 1040 is used to report all of a taxpayer’s income. Employees and individual contractors both submit a 1040 tax form to report all their income.

Resources and assistance for understanding Form 1099

If you’re uncertain about whether or how to fill out Form 1099-NEC, Form 1099-MISC, or any Form 1099 forms, contact a tax professional. They can help you figure out whether you need to fill out the forms and how to complete them properly.

If you’re a taxpayer and have questions about reporting non-employment income, talk to an accountant or other tax professional for guidance.

If you’re a lawyer and want to learn more about effectively managing your law firm, book a demo with Clio today. Our software helps you streamline your practice, manage your firm, track your billing and expenses, and engage clients. Learn how we’ve helped law firms like yours transform their practice, increase their revenue, and save valuable time.

The information in this article applies only to US practices. This article is for informational purposes only. It does not constitute legal, business, or accounting advice.