Proper preparation is a must for all taxpayers but if you own a small business, there are a few additional steps you need to take to get ready for tax season—and, depending on your business, that may include IRS Forms 1096 and 1099.
But what, exactly, are IRS Forms 1096 and 1099? Does your business need to submit both forms or even either to the IRS? And, if so, how do you fill out the forms—and when do you need to submit it to the IRS? Sit back as we answer all these questions and more.
What is Form 1096?
Form 1096 is essentially a cover sheet used to mail forms for reporting non-employee income to the IRS.
If you’re a small business, odds are you’ll mainly be using it to submit Form 1099, the form used to tell the IRS you’ve paid an independent contractor more than $600 in a financial year. It is a transmittal form that summarizes, for each payer, the total amount of wages paid during the calendar year, total income tax withheld from those wages, and total social security tax (or railroad retirement tax) withheld.
Other forms that are less likely to be filed by a small business but also need a Form 1096 cover sheet include Forms 1097, 1098, 3921, 3922, 5498, 8935, and W-2G.
Form 1096 is only used for paper submissions to the IRS. For information about filing the above forms electronically, see Publication 1220.
There are two main parts to Form 1096.
The first part asks for basic information like your name, address, contact information, employer identification number, and the total number of 1096 forms you’re submitting to the IRS this year. The information you’re entering here applies to you/your business, not the independent contractor(s) you’re submitting a 1099 for.
The second part lists every possible form you could attach to Form 1096, and to recap, those are: Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G.
How many Form 1096s does a small business need to file?
Every Form 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G mailed to the IRS must come with its own Form 1096 cover sheet. The IRS treats every version of Form 1099 as a separate type of form, and that there are actually 16 different versions of Form 1099.
Also, if you are submitting 250 or more copies of Form 1096, they must be filed electronically. Failing to do so could result in a penalty from the IRS.
Can Form 1096 be filed electronically?
Most small business owners will be mainly using Form 1096 to submit some version of Form 1099. According to the IRS, individuals filing 1099s electronically do not need to submit an accompanying 1096. However, If you’re e-filing any of the other forms associated with Form 1096, you must use the IRS’s FIRE system to do so.
What are 1099 Forms?
1099 Forms have been around for a long time, but the IRS made some changes by introducing a new Form called the 1099-NEC Non-Employee Compensation. The IRS has also changed, the title and purpose of Form 1099-MISC from Miscellaneous Income to Miscellaneous Information.
Businesses will now file Form 1099-NEC for each person in the course of the payor’s business to whom they paid at least $600 during the year. This payment would have been for services performed by a person or company who is not the payor’s employee.
Other payments over $600 that a payer makes in the course of the payer’s business for things such as rent, prizes, and awards, or “other income payments” are reported on Form 1099-MISC.
Who Needs to File Form 1099-NEC?
The “general rule” is that business owners must issue a Form 1099-NEC to each person to whom they have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099s for payment made for personal purposes. You are required to issue 1099-NEC reports only for payments you made in the course of your trade or business.
Other 1099 Forms That May be Considered
There are other 1099 Forms that might apply to business owners:
- 1099-INT – This is the tax form used to report interest income, paid by all ‘payers’ of interest income to investors or private lenders at year-end.
- 1099-DIV – This Form is typically used by large banks and other financial institutions to report dividends and other distributions to taxpayers and to the IRS, If you own and operate a C-Corporation with shareholders, this would be the Form to report payments to those investors.
- 1099-R – This Form is used to report the distributions of retirement benefits such as pensions and annuities. Also, if you take distributions from a self-directed IRA or 401k, you would receive some type of Form 1099-R.
Who are you required to send a Form 1099-NEC?
You are required to send Form 1099-NEC to vendors or subcontractors during the normal course of business you paid more than $600, and that includes any individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or Estate.
Who are considered Vendors or Subcontractors?
Essentially, this is a person or company you have paid for services that aren’t an employee.
Are there exceptions?
Yes, there are and the list is fairly lengthy, but the most common is that you don’t need to send a 1099-NEC to:
- Vendors operating as S or C-Corporations
- LLCs or partnerships (ONLY if they are taxed as an S or C-Corp
- Sellers of merchandise, freight, storage or similar items.
- Payments of rent to or through real estate agents (typically property managers). However, keep in mind you need to issue a 1099 to a landlord you are paying rent, unless they meet another exception.
- Credit card payments and PayPal. The IRS allows taxpayers to exclude from Form 1099-NEC any payments you made by credit card, debit card, gift card, or third-party payment network such as PayPal. (These payments are being reported by the card issuers and third-party payment networks on Form 1099-K.)
Issuing A W-9 Up Front Can Help
One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor’s mailing information, Tax ID number, and also require them to indicate if they are a corporation or not (saving you the headache of sending them a 1099 next year).
Do foreign workers require Form 1099-NEC?
If you hire a non-U.S. citizen who performs any work inside the United States, you would need to issue them a Form 1099-NEC. If they are not a citizen AND perform all of their work outside the U.S., you are not required to issue a 1099-NEC. However, It is your responsibility to verify that the worker (1) is indeed a non-U.S. citizen, and (2) performed all work inside or outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign, and return to you Form W-8BEN.
Taxpayers are required to issue and mail out all Forms 1099-NEC, 1099-MISC, 1099-DIV, 1099-INT, and 1099-R (to those who they paid more than $600 in) by no later than February 1st. 1099-NEC forms and the accompanying 1096 must be mailed to the IRS, or filed electronically by February 1st as well (NOT the end of February- the old rule).
The deadlines to IRS for all other 1099 forms: 1099-MISC, 1099-DIV, 1099-INT, and 1099-R, is by mail with a Form 1096, by February 28th, and if electronically, by March 31st.
What are the Penalties if you miss a Deadline?
Penalties for not filing a correct 1099 can add up quickly and vary from $50 to $110 per Form depending on how long past the deadline. Moreover, if the IRS can prove that a business intentionally disregarded the requirement to provide a correct payee statement, they are subject to a minimum penalty of $550 per statement, with no maximum!
Bookkeepers Can Make the 1099 and 1096 Filings Easier
Accountants, if you work with one, will help you file any and all 1099 and 1096 forms, but having everything properly organized beforehand is the responsibility of a bookkeeper. They can have all your payment history, W-9s, and other pertinent information at the ready, so that when it comes to filing taxes at the end of the year, producing your 1099s and 1096s will be on time and accurate.