How to determine reportable vendors during 1099 season

1. Knowing which vendors require 1099 forms is critical for compliance.
   Misreporting or overlooking reportable vendors can result in IRS penalties, so it’s essential to understand which payments trigger filing requirements.
2. Follow a structured process (like the 7 steps from Avalara) to ensure accuracy.
   A clear, repeatable workflow helps businesses organize vendor data, identify reportable payments, and file correct forms every time.
3. Automation streamlines the IRS information form filing process.
   Using automation tools reduces manual work, minimizes errors, and helps ensure timely, compliant 1099 submissions.

Reportable vendors meet specific criteria that require businesses to file information returns such as the 1099-NEC, 1099-MISC, and 1042-S.

• You must file a 1099-NEC if you paid $600 or more to an independent contractor, freelancer, or service provider during the year. That threshold increases to $2,000 for tax year 2026.
• You must file a 1099-MISC if during the year you: 
  • Paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
  • Paid at least $600 in rent, attorney payments, or other miscellaneous payments.
  • Made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
• You must file a 1042-S for each foreign person you paid amounts subject to income tax withholding, including:
  • Payments for services rendered
  • Royalties
  • Prizes and awards
  • Dividends

Correctly determining which vendor payments need to be reported is the linchpin of accurate information report filing. If you don’t know which vendors received payments that need to be reported, you can’t file those reports accurately. And mistakes, including failure to file and late filing, can be subject to escalating IRS penalties that can make them quite costly.

Getting vendor reporting right takes careful data collection and organization. Here’s our recommended process for determining reportable vendors.

Step 1: Aggregate your vendor data

To determine which vendors are reportable, turn to your vendor data. When you export this data, make sure to include key data that affects reportable status for the tax year.

• Vendor name, address, country, and other contact information
• Vendor identification numbers
• Total payments and classifications
• Total amount of tax withheld

Step 2: Identify vendors with reportable payments

Review all vendors who received payments for the given tax year, regardless of reportable status or total payment amount. Include both U.S. and non-U.S. vendors. Keep in mind payment types have different reporting thresholds, and some payments may be reportable even if the vendor’s tax classification is typically exempt. Report payment for any vendor you withheld federal or state income tax from, regardless of how much you paid them.

Reportability varies according to type of corporate structure as well. Among U.S. vendors:

• Individual/sole proprietors and partnership LLCs are reportable.
• Trusts/estates are reportable, with exceptions.
• S-corps and C-corps are not reportable, with exceptions.
• Nonprofit or government entities are not reportable.

Step 3: Determine the appropriate information return

Based on payment type and vendor’s location, decide which form to issue.

• 1099-NEC (Nonemployee Compensation)
• 1099-MISC (Miscellaneous Information)
• 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding)

U.S. vendors may receive both a 1099-NEC and a 1099-MISC, depending on the type of payment. Reportable payments to non-U.S. vendors must be reported on Form 1042-S. Form classification may already be available in your accounting system or ERP.

Step 4: Gather additional information for Form 1042-S vendors

For each non-U.S. vendor receiving a Form 1042-S, additional information is required, including various codes — such as income, status, exemptions, etc. — and a unique identifying number. This is used to match original forms with any corrections or amendments for the same payee.

Step 5: Generate applicable tax forms for distribution

For each reportable vendor, generate a corresponding information return. Tax forms can be distributed to vendors via paper or electronic delivery.

Step 6: E-file information returns with the IRS

Electronic filing is required if you’re submitting 10 or more aggregate information returns, including payroll forms. The IRS offers two free e-filing systems. You may also use a third-party provider.

For tax year 2025, the IRS provides two systems for electronically filing information return.

• The IRIS Taxpayer Portal allows users to file 1099-NEC and 1099-MISC forms. It’s expected to become the sole IRS e-filing option beginning with tax year 2026 (filing season 2027).
• The FIRE system remains available for e-filing information returns through tax year 2025.

Step 7: Report income taxes withheld

If you withhold income taxes from vendor payments for nonpayroll services, you must report those amounts to the IRS. In some cases, you may also need to report them to the appropriate state agencies. State requirements vary, so it’s important to research each jurisdiction’s rules. The IRS requires different forms based on how the payment is reported.

The most challenging aspect of determining reportable vendors is keeping up with IRS and state filing requirements, especially since the passage of the One Big Beautiful Bill Act. The rules often change from year to year and can be vague or confusing. In this environment, it can be difficult to be sure whether any given vendor meets payment thresholds or other reporting requirements.

Trying to prepare vendor information returns manually opens you up to errors while taking up precious time. Avalara 1099 & W-9 automation replaces manual confusion with certainty. Features such as built-in IRS validations, time-stamped certifications, secure data storage, and documentation in case of audits or disputes help businesses stay in compliance with IRS rules for 1099 reporting.

Determining reportable vendors is key to accurate 1099 and 1042-S filing. For more help with the whole process, see our updated desktop procedure for tax year 2025, designed to help teams navigate every step of 1099 and 1042-S filing. Download the free guide to streamline your 1099 journey, improve accuracy, and reduce reporting risk.