Demystifying 1099s: Who, What, When, and Where ...
Surprised by tax laws? Join the club!
Small business owners can find themselves in a bad spot if they haven't done their tax homework or sought out professional advice. Given the IRS's recent increase in penalties for 1099s, today's blog post is devoted to keeping you in compliance so you don't have any unfortunate (and costly) surprises.
If you’re like many small business owners, hiring other professionals to help complete a project for your client may be necessary, but figuring out the potential tax paperwork is probably not at the top of your list. Let's dig in!
Who needs to issue a 1099?
Generally, you should issue a 1099-MISC when you pay $600 or more to another person or entity within a tax year for business purposes. If the payment is for personal reasons there is no need to issue a 1099.
Examples of services that require a 1099:
Services performed by independent contractors (stay tuned for another blog post on contractors vs. employees),
Prizes and awards,
Rent (if under a commercial lease),
Royalties (if paid $10 or more; exception to $600 rule), and
Interest on business debts.
Exceptions to issuing 1099s:
Services such as phone service or internet do not require you to file a 1099;
Corporations. You do not have to issue 1099s to incorporated businesses. How do you determine if a business is incorporated? Always ask someone to fill out a form W-9 if you are paying them $600 or more. This form gives you all the information you need to issue a 1099 and they must declare if they are a corporation (i.e. they would check the “C Corporation” or “S Corporation” box on line 3 or “LLC” taxed as C or S corporation). If any of these boxes are checked, you can disregard issuing a 1099.
If you are paying an attorney, you may still need to issue a 1099 even if they are a corporation (or LLC taxed as a corporation).
When to issue?
Form 1099-MISC must be issued to both the recipient and the IRS. The table below shows the due dates for each.
Due Dates for the Current Tax Year
- January 31, 2018: 1099s due to all recipients. All 1099s are due to the IRS if Box 7 has an amount reported.
- February 28, 2018: 1099s due to the IRS if no amount is reported in Box 7.
- April 2, 2018: 1099s due to the IRS if they are electronically filed (unless Box 7 has an amount reported).
The above dates stay the same in most tax years. The exceptions are if the deadline falls on a Saturday, Sunday, or legal holiday, then the return (1099) is due the next business day.
Typically any 1099 you issue is due to the IRS a month after you issue a copy to the recipient, which allows you to correct any errors they may find after reviewing. If there are any errors, simply resend the 1099 to the recipient with accurate figures and mark the “Corrected” box on top of the form. The correct version can then be sent to the IRS. However, if Box 7 Non-employee compensation is filled out, then the 1099s to both the recipient and the IRS are due at the same time. Box 7 is typically filled out for all independent contractors, so make sure to get on top of your 1099s after the new year!
How to issue a 1099?
If you are issuing a small number of Forms 1099-MISC, paper filing is an easy option. Beware though! Do not print these from the IRS website. If you print from their website, these forms are not able to be scanned. The IRS may penalize you for a form that can’t be scanned. You can order an appropriate Form 1099-MISC from office supply stores or directly from the IRS.
Forms can also be electronically filed with the IRS by enrolling in their FIRE program. See IRS FIRE for details.
Summary Form 1096
The fun doesn’t end after you’ve completed the 1099-MISC forms! The IRS also requires you to submit a summary return Form-1096, which is a top-level summation of all information returns you are filing. Complete and submit this along with the 1099s you are sending to the IRS.
What happens if I don’t issue a 1099?
We all get busy, especially small business owners, so it is easy to forget about issuing 1099s. Don’t let this happen! The IRS recently started cracking down and the penalties for not issuing a 1099 are STEEP! If you’re ever unsure if you should issue a 1099, please consult a tax professional. Investing in a short consult could save you a significant amount in penalties.
Penalties for Late Issuance
- $50 per 1099 if not more than 30 days late
- $100 per 1099 if 31+ days late (but before August 31st)
- $260 per 1099 if after August 31 or not at all
- $530 per 1099 if intentional disregard
This has been a lot of information, but we hope it’s been useful and will get you on track for filing your 1099s. As always, Polaris Tax and Business Services is here to help with your tax preparation and planning needs. If you’re ever in doubt or short on time, we’ll be happy to take the tax stress off your shoulders so you can focus on what you enjoy!