If are self-employed or own a small business, chances are you have seen a 1099-Misc form. There is a great deal confusion surrounding this funny little tax form.

The Nitty Gritty

I have seen many clients who do not realize that indeed, they are required to track payments made to a specific vendor/person for 1099-Misc reporting purposes.

The Big Picture

For every monetary transaction that occurs the IRS has a system in place to capture who is paying and who is receiving, just to make sure that Uncle Sam collects every possible penny.

Let’s start off with a tax form we are all familiar with, the well-known Wage and Tax Statement otherwise known as the good ole’ W-2.  An employer will issue W-2’s to employees which summarize their wages and taxes. Next, the employer submits a W-3 to the IRS (W-3 is just a summary of the W-2’s issued). The IRS takes the W-3 and matches through their system to make sure everyone on the W-3 reported the exact same amounts on their tax return. If everything matches, then you are all set. If the W-2 or W-3 do not match or was not filed well, now we have grounds for audits and penalties. Make sense?

What

The 1099-Misc has a similar function to above-discussed W-2 but, the 1099-MISC is meant to capture income of self-employed individuals for the purpose of self-employment taxes.

Who

First, let me explain that a subcontractor or otherwise referred to as an Independent contractor is anyone you pay for services that are not a Corporation or your employee (paid on the payroll with appropriate taxes).

**LLC’s do not count as corporations in regard to the 1099-Misc. Since many small businesses are LLC’s, it gets tricky. So, basically, if you pay a sole proprietor or an LLC you are paying an Independent contractor. That person is receiving untaxed money from you for a service. In order for the IRS to make sure they pay taxes on it the person paying needs to track and file.

You must track and issue a 1099-MISC to all Independent contractor who meets the following criteria:

  • 00 or more in gross royalties
  • 00 or more in the following:
    • Rent (for business or trade not residential)
    • Compensation for services
  • Attorney’s Fees (This is tricky; these get reported even if they are a corporation)

As you are reading this you can probably think of 2 or 3 people you have paid that you should be tracking and issuing a 1099-MISC for.

In contrast, if you are self-employed as a sole proprietor or an LLC, YOU are also an independent contractor and may be receiving a few 1099-MISC’s yourself.

How Do I know if someone is a Sole Proprietor, LLC, or a Corporation?

You are required to have every independent contractor fill out a W-9 form.

This form collects all the pertinent data you need to file a 1099-Misc. I suggest you start a three-ring binder with all your independent contractor in alphabetical order.

Best practice is to make sure you have a completed W-9 on file before every paying an Independent contractor. This assures you have everything you need up front to be compliant.

Once the year has ended you need to tally up the totals you paid to these individuals either with your financial software like QuickBooks or a spreadsheet. Whatever method you use to keep your books. You will enter those amounts in the corresponding boxes on the 1099 form.

You will need either find a site online that will let you e-file your 1099-Misc (for a small fee) or you will need to order blank forms from the IRS (many weeks in advance as they do take a while to receive) for more detail on the 1099-MISC form please check out the form and instruction.

When

1099-MISC’s are due to the recipient by January 31st

Employer copies need to be filed at the same time, along with a completed  1096.

You already pay enough in taxes, why pay penalties too?

Late or non-file will cost you:

  • 1-30 days late: $50/form ($186K Max)
  • 31 Days late but before August 1st: $100/form ($532K Max)
  • After August 1st: $260/form ($1,064,000 Max)
  • Intentional Disregard: $530/Form (No max)

Read more detail on penalties Here

Best Method

The Best and safest route would be to find an amazing accountant (I know a few…) and employ their services and expertise on this subject. Then sit back and relax.

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