Every year, January flies in and out before we know it, and often business owners are scrambling to meet the January 31 deadline to get out their 1099s. But there are often questions around this which we answer below.
What is IRS Form 1099-MISC?
The 1099-MISC assists small businesses and independent contractors (or any entity that is not as S-Corp or C-Corp) in reporting their income and determining how much tax they owe. They receive these forms from companies that have paid them $600 or more in a given tax year.
Who Needs to Receive a 1099?
This one is relatively easy. Basically, any person or company (that is not incorporated) that you have paid at least $600 to during 2019 will likely need a 1099. In most cases, this is for services provided by independent contractors or other vendors, but the list goes well beyond that too. Here’s a handy compilation from the IRS site:
- Rents.
- Services performed by someone who is not your employee.
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
In addition, you much also report direct sales of at least $5,000 of consumer products to a buyer for resale from anywhere other than a permanent retail establishment.
There are also exceptions.
- File Form 1099-MISC on paper or electronically by January 31, 2020, if you are reporting NEC in box 7.
- File and furnish a copy of Form 1098-F by January 31, 2020. Under section 6050X, you must furnish the taxpay copy at the same time you file.
How Do I Prepare 1099s?
- Make sure you have all the correct information for each of your contractors or vendors. You will need a completed Form W-9 for each vendor, which will indicate their filing status as well all their other information, so you will know if you need to send them one or not. If you don’t have W-9s for all your vendors, ask them to send you a completed one right away and going forward request one when you start work with new vendors.
- Get the correct forms directly from the IRS. If you are planning to file paper versions, you have to contact the IRS for them since they use specific forms that are scannable by their equipment. Additionally, most online accounting software packages will allow you to create, distribute and file your 1099s online for a fee.
- Fill out and mail the forms. This is pretty self-explanatory but be extra careful to double check that all information is correct, particularly the taxpayer ID and dollar amount.
- Complete IRS Form 1096, which summarizes the totals from all your 1099s for the IRS. If you are filling through mail, you have to mail Form 1096 and a copy of each Form 1099 by the last day of February. If you decide to file electronically, you have to mail them to the IRS by March 31. Ideally, we suggest you mail the 1099s and 1096 at the same time to avoid any confusion.
- Keep copies of each 1099 for your records in case any questions arise from the IRS or any of your vendors.
What Happens If I Don’t Send 1099s?
Other than making it more difficult for your vendors to file their taxes in a timely manner, the IRS can penalize you too. If you fail to file by the due date, and you can’t show reasonable cause, you may be subject to a penalty. The penalty applies:
- If you fail to file timely
- If you fail to include all information required to be shown on a return
- If you include incorrect information on a return
- If you file on paper when you were required to file electronically
- If you report an incorrect TIN
- If you fail to report a TIN
- If you fail to file paper forms that are machine readable
The amount of the penalty is based on when you file the correct 1096 and are as follows:
- $50 per return if you correctly file within 30 days with a maximum penalty of $556,500 per year ($194,500 for small businesses as defined by the IRS).
- $110 per return if you correctly file more than 30 days after the due date but by August 1 with a maximum penalty of $1,699,500 per year ($556,500 for small businesses).
- $270 per return if you file after August 1 or you do not file required information returns with a maximum penalty of $3,339,000 per year ($1,113,000 for small businesses).
How Can I Get Help with This?
We have extensive experience filing all sorts of tax forms and would be happy to help you with this process. Reach out with any questions or for help as soon as possible, because the deadline is right around the corner!