Employers must submit Form 1099 to their vendors and contractors by Jan. 31 — here's what you need to know about that process.

If your business paid independent contractors and vendors during the past calendar year, you must send them their 1099 informational tax forms by January 31. It's an IRS requirement to send these out because self-employed workers need this information to prepare their tax returns.

What can cause confusion is the fact that there are different versions of the 1099, and some organizations may have to process both a Form 1099-K and a Form 1099-M.

What Is Form 1099-M?

The 1099-M, also known as 1099-MISC, lists compensation earned by self-employed workers like freelancers or independent contractors. This group does not include employees earning wages on a Form W-2, but rather workers who are paid by the project or job.

Whenever your business hires this type of worker and pays them $600 or more in a tax year, you need to send them a 1099-M. The only exception is when the freelancer or contractor's business is incorporated, in which case you would not be required to send them a 1099-M.

"The IRS relies on hiring organization (payors) to send out these Forms 1099-M so they can verify the income of self-employed workers," says Ellen Feeney, Vice President, Counsel at ADP. "That's why the IRS charges a penalty to organizations who fail to send out Forms 1099 by the deadline."

What Is Form 1099-K?

Form 1099-K is used for payment card transactions through third-party networks. It generally applies to debit, credit and prepaid card payments processed through parties like VISA, Mastercard, PayPal or Square. It also includes networks like Uber and Airbnb, which process payments between customers and vendors or freelancers.

Settlement organizations use this form to report when they send a vendor/freelancer a large number of card or network transactions during the year. If a vendor/freelancer received more than 200 transactions through the card or network and over $20,000 in payments, they must receive a 1099-K, according to the IRS.

"Unless you're running a third-party settlement network, chances are good that you will not be sending out Forms 1099-K," says Feeney. "However, you could receive one if your business meets the transaction threshold."

How Should Businesses Prepare?

As is the case for anything tax-related, keeping accurate and comprehensive records is the best way to stay compliant with these forms.

"Employers should make sure they are closely tracking all independent contractors so that anyone who meets or exceeds the 1099-M payment threshold receives a Form 1099," says Feeney.

In addition, your actual income could end up different from the sum of your 1099s. A 1099-K reports the gross total of your transactions, but what you actually received may be lower due to credit card processing fees and commissions paid to the network. Remember that you need to track your own income and compare it with the Forms 1099 received. Don't rely entirely on what is reported, and advise your freelancers and contractors to do the same.

Also, be aware that the IRS has already issued a draft Form 1099-NEC (for Non-Employee Compensation) which will be used to report payments made in 2020. Thus, payments made to independent contractors/freelancers in and after 2020 will no longer be reported on the Form 1099-M.

Finally, start processing these forms and reviewing your own tax situation as soon as possible. With the January 31 deadline coming up, you want to give yourself some breathing room to check whether you need to send out Forms 1099 as you prepare to receive the documents for your own return.

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