Article Written by : Monique Colver
It’s that time of year again, when questions about 1099’s fly through the air like sparks before an electrical storm. Who sends them? Who receives them? Why? When? How? Here’s a few basics, just to get started with, dealing ONLY with the 1099-MISC:
1099’s are issued by your business to anyone who provides services to you for $600 or more during a calendar year. Unless the provider of services is incorporated. Then you can skip the 1099.
How do you know if they’re incorporated? Prior to paying anyone for services, you should hand them a W-9, or mail it, or email it. The provider of services completes the W-9, and on it they can indicate if they’re a corporation and therefore not subject to receiving a 1099. The W-9 also gives you the all-important tax ID number, without which you cannot file a 1099. This is why we ask for a completed W-9 prior to payment, and, hopefully, prior to receiving services, to avoid the sort of skirmishes wherein one party asks for the information in order to comply with the IRS regulations and the second party refuses to provide it, and they’ve already received their payment. (See below for what to do in that case.)
There are exceptions, of course, this being a federal tax law sort of thing. Lawyers are to receive a 1099 if you pay them anything at all. You can often find their tax ID on their letterhead, in which case, no need for a W-9.
What if materials are included in what you paid to the service provider? You can break those out, by completing the 1099 for only what the service was. However, you’re not required to – if you have all costs posted to the same account in your accounting software and aren’t sure which are materials and which are services, send a 1099 for the entire amount. It’s the provider’s responsibility to deal with that on their own tax return, and it’s rather easily done.
Cash or accrual? CASH. You 1099 someone for the amount you physically paid them during the year. If they billed you another 100 grand but at year end it’s still on your books as a payable, it doesn’t count. That’ll be for next year.
Rents? If you’re paying rents, you’re also required to include rents paid on a 1099. There’s a separate block for rent paid.
When: 1099’s are due out by January 31st, so the sooner the better. The filing for the feds comes later, but you must have the 1099’s out to the recipients by January 31st.
How: There are so many options for how that I’m not sure we can cover them all at once. You can print them from your accounting software. You can order free forms from the IRS, and print them on those, though if you haven’t ordered your free forms by now, you won’t have time. You can buy forms at the office supply store. You can file online with various providers who will mail the forms for you and efile with the feds. This is my favorite, especially if a company only has 1 or 2 1099’s. I use filetaxes.com, but there are other options.
Red forms or not? IRS regs require that the 1099 and the 1096, which is the summary that goes to the IRS with their copies, be printed on their red forms. This is why the forms purchased at the office supply store come with red copies. However, I know people who’ve been printing them on plain paper with black ink straight out of their software for years, with no problems and no complaints from the IRS. Yet another reason why online filing is so great – there’s no need to worry about it.
Why? It’s the IRS. You want I should have an answer for what they do? But the short version is, the IRS wants to be able to check to see if someone’s reported all their income, and one way they do that is by checking 1099’s against the person’s tax return. So in completing 1099’s, you’re helping the government collect on taxes! That should give you a warm fuzzy feeling about doing it. There IS a penalty for not doing them by the way, should they happen to find out you didn’t do it.
Another warning on 1099’s: This year I’ve seen an increase in the number of business owners who refer to service providers as “1099 employees.” There is no such thing. You either have employees, or you have subcontractors. Do not confuse the two. Just saying someone’s a subcontractor so you don’t have to pay payroll taxes doesn’t work either. There are guidelines to follow, and if the IRS finds out you’ve misclassified an employee as a subcontractor, the penalties will be steep – not to mention the back payroll taxes. Not to mention your state – if they catch wind of it, back payroll taxes and penalties will mount up quickly. All it takes is one dissatisfied “1099 employee” to bring up the issue, so please don’t do it.
There’s so much more to 1099’s than I can cover here, so if you have questions about 1099’s, ask one of us who knows. We’re awash in 1099’s and W-2’s right now, and we’re not unfamiliar with the process!
