So what is a 1099 form? The dreaded Form 1099-MISC may be one of the worst, most-time consuming requirements that the IRS puts on small businesses. However, we are all compelled to send out the forms although if I was you I would outsource the crap out of it. Even if you outsource the filling-out and submission of the form it is essential that you understand the why and how.
What is a 1099 form and why must we file the form?
Form 1099 is used to report various types of income other than wages, salaries, and tips which is normally on the W-2. The main example of reportable transactions are amounts paid to a non-corporate independent contractor for services or nonemployee compensation.
What the heck does that mean? This is the IRS’s attempt to catch all the income paid to independent contractors to ensure that they pay the proper amount of Self Employment tax.
Form 1099 Requirements
The short, simple answer is to file a form 1099 for each person who your business paid at least $600 for services performed. That means only business payments so don’t worry personal payments are not reportable. There are all kinds of other types of reasons that the Form 1099 is required (check Form 1099 Instructions) but the most common is for independent contractor services, professional service fees or directors’ fees. The most interesting example of a required Form 1099 payment is that you must file for fish purchased with cash. Who would have thought fishing would be such a high priority with the IRS.
Beware that even if the independent contractor has a Limited Liability Company (LLC) the Form 1099 may still be required. We will talk about exceptions later in the article. One question you might have is what is nonemployee compensation?
- Made the payment to someone who is not your employee;
- Made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
- Made the payment to an individual, partnership, estate, or, in some cases, a corporation
- Made payments to the payee of at least $600 during the year.
So what kind of information should you get from the independent contractor or company to fill out the form? The easiest way is have them fill out a Form W9 and return it to you.
- Federal Tax Classification (Sole Proprietor, C Corp, S Corp, LLC, or Partnership)
- Either Social Security Number or Employer Identification Number
The Form 1099 must be submitted to the IRS along with the cover sheet From 1096. In addition, the form must be given to the independent contractor or recipient prior to January 31st. Generally, your business must report payments to independent contractors in box 7 of the Form 1099-MISC.
Form 1099 Exceptions
As with anything to do with the IRS or tax code, there are scenarios where your business would not be required to file the form.
- Payments to a corporation (including a limited liability company (LLC) that is treated as a C- or S-Corporation).
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments of rent to real estate agents.
- Wages paid to employees (report on Form W-2, Wage and Tax Statement).
- Business travel allowances paid to employees (may be reportable on Form W-2). Payments made under an accountable plan are exempted.
- Cost of current life insurance protection (report on Form W-2 or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.).
- Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government.
Your business has a couple of choices for taking care of the Form 1099-MISC filing requirements. One option is to, add the task to your accounting firm engagement letter. After that you will have to provide the accounting firm with a list of your vendors with the pertinent information listed above. Another option, is to have your accounting software do the hard work for your business. Intuit has a good feature that is separate from their software to aid with Form 1099-MISC preparation and e-filing with the IRS (check it out HERE), which costs $14.99 for three 1099s.
What are your other concerns on what is a 1099 form?