The end of the year is always a hectic time for business owners. Between managing your day-to-day operations, planning for the upcoming year, and dealing with the holidays, the period from Thanksgiving through the New Year can feel like a rollercoaster ride.
Of course, if you are properly handling taxes for your business, the end of the year is also tax time. One of the most important steps in your company’s tax preparation is filing the proper tax forms for your workers. One tax form that often creates confusion for employers is Form 1099. Unlike traditional employees, who are issued W-2s, 1099s are used to report payments you made to independent contractors (ICs) over the course of the year.
In turn, 1099s help ICs accurately report their income when they file their taxes, as well as provide a mechanism for the IRS to ensure IC income is properly reported.
Because the rules for filing 1099s can differ depending on how much ICs were paid, how they were paid, and what business-entity structure they use, dealing with 1099s can be tricky. Not to mention, filing 1099s incorrectly can result in fines and other penalties from the IRS, so it’s crucial you understand exactly what the IRS requires.
To help you better understand these requirements, we’ve provided answers to some frequently-asked questions about 1099s. While there are a series of different 1099 forms, here we’ll focus on the most common version used with ICs: 1099-MISC.
Q: When must I file a 1099?
A: Generally speaking, if you paid any IC more than $600 for services rendered to your business in a given year, you’re required to send a 1099 to the contractor as well as file a copy with the IRS.
You don’t need to file a 1099 for personal or household services, only for those services performed for your business. Moreover, 1099s are only required when paying for services, not for merchandise, equipment, or storage. You are also not required to send 1099s for payments of rent made to real estate agents or property managers.
Q: Do all business entities get a 1099?
A: The IRS typically requires you to issue a 1099 to all business entities except corporations, including both S corporations and C corporations. This means you need to send the form to contractors operating as sole proprietors, partnerships, and limited liability companies (LLCs). However, you are not required to send 1099s to LLCs that are taxed as corporations.
That said, there are a few instances when you are required to report payments to corporations, such as payments made to lawyers who are incorporated. There are other situations where 1099s are not required, so consult with as and/or you CPA to ensure you’re issuing 1099s to all of the appropriate contractors.
Q: Does it matter how the IC was paid?
A: You must report all payments made to contractors using cash, check, and direct deposit. You do not need to issue 1099s for payments made by credit card, debit card, gift card, or through online payment networks such as PayPal—even if those payments total more than $600.
Q: What information do I include in the 1099?
A: To fill out a 1099, you’ll need a few pieces of basic information about the IC, such as their name, business address, and social security number/tax identification number. All of the information you need for the 1099 can be collected on their W-9 form, which is similar to the W-4 you have employees fill out.
For this reason, you should require every contractor you hire to fill out a W-9 before you pay them.
Q: What are the deadlines for 1099s?
A: You’re required to mail out 1099s to every IC by January 31, 2020. Don’t forget, you now have to send transmittal Form 1096 to the IRS by January 31st as well—not the end of February like in year’s past. Also, depending on state law, you may have to file the 1099-MISC with our state tax agency, typically by January 31st.
Q: What are the penalties for missing a deadline?
A: Depending on how late you file, penalties can range from a $50 to $100 fine per form, with a maximum of $1.5 million for the year. If you intentionally disregard sending a correct 1099, you can be subject to a minimum penalty of $250 per statement, with no maximum.
If you’re late sending your 1099s for 2019, contact us so we can help you fix that and put a system in place for the future, so it won’t happen again.
Don’t stress out
Although dealing with all of the tax forms required by the IRS can be a hassle, you can eliminate most of the stress—and risk—involved by implementing sound business systems. A Creative Business Lawyer® can support you in setting up an array of systems, not just for managing your finances and taxes, but for dealing with legal and insurance issues as well.
And when it comes to working with independent contractors, taxes aren’t your only concern. You’ll also need to pay close attention to ensure all your ICs are properly classified and have solid employment agreements in place. Meet with a Creative Business Lawyer® today for trusted guidance on hiring, classifying, and paying your ICs.