If you run a business which occasionally relies on independent contractors, then you probably are at least aware of the existence of 1099s. You might already use them regularly. But many businesses find 1099s to be a source of uncertainty, which is quite understandable considering that even over recent years, there have been some changes to how they are handled. So, let’s run over what you need to know about 1099s.
What Is a 1099 Form?
A 1099, more properly called a “1099-Misc,” is a form which you send out to your contractors in January each year. It is the contractor equivalent of the W-2 which you have for your employees. Much of the information that goes on the 1099 is the same basic information you got from the contractor’s W-9 when you brought that person onboard. You then fill in the amount of money you paid that person throughout the year.
One copy goes to the contractor, while another goes to the IRS. The contractor needs the copy so that he or she knows how to properly file taxes on the income received from you. The IRS of course needs their copy to check the contractor’s taxes and ensure that everything adds up.
What Is the Filing Deadline for 1099 Forms?
The due date to issue your 1099 forms to your contractors is January 31st. This is true in all cases. This is now also the due date for reporting the 1099 forms to the IRS—but only if you are reporting in box 7 on the form. In the past, this was not the case; the January 31st deadline applied for your contractors, but you had longer to inform the IRS. Now you do not.
But if you do not report in box 7, the old due date applies, giving you through the end of February to get the forms to the IRS. But you still must get them to your contractors by January 31st.
Who Do You Need to 1099?
If you have paid at least $600 to any contractor, that person may need to be issued a 1099. Technically, this does not need to be $600 in cash. It could also come in the form of rents, prizes, materials, or so forth.
The exact type of business operated by the contractor is not (usually) relevant. The person could be a sole proprietor, or they could be operating a limited liability company or some other type of business. All that is relevant is the amount of money you paid them.
Many business owners are surprised by the 1099 requirement, or do not take it seriously (this especially seems to happen among sole proprietors). Nonetheless, it is very important to stay compliant.
Situations Where You Do Not Need a 1099
Still, you may also be surprised by all the situations where a 1099 is unnecessary—or could even add unnecessary complications to your taxes as well as your contractor’s taxes.
- First, your employees do not get a 1099 form. They always are given a W-2.
- Contractors you have worked with outside of your business. For example, if you hire a construction worker to install an upgrade to your house, you do not need to 1099 that person.
- If you submit your payments to your contractor electronically—through PayPal for example—sending out a 1099 is unnecessary and inconvenient. The reason is that PayPal and other electronic payment systems are already submitting a 1099-K for the contractor. If you issue a 1099-Misc, you are duplicating this effort. This generates unnecessary paperwork all around, and leaves the contractor uncertain how to file the income appropriately.
- There are some other exceptions to the 1099 rule as well. For example, you do not have to 1099 an S-Corporation or C-Corporation, unless it is a lawyer. Those who sell freight or storage do not need a 1099, and you also do not need to 1099 a real estate agent you have paid rent to. But if you paid rent to a landlord, you still must issue the 1099.
What Happens If There Is a Mismatch?
It should not surprise you overly much if at some point during doing business with contractors, you are issued a document called IRS Notice CP-2100A. This document is vague and confusing, and can leave you feeling bewildered both about why you have received it and what you are supposed to do.
A IRS Notice CP-2100A is sent out in a situation where there is a TIN mismatch. This means that the IRS has found a discrepancy in the Tax Identification Number (TIN) for a contractor.
This is common, and there are many reasons it may have occurred. Someone may have made a typo, or your contractor may have used an EIN where an SSN was needed. Someone could even have gotten a name wrong on a form (like putting in a DBA when an EIN was registered under a legal name).
You need to track down the correct information and submit it to the IRS, or show the IRS that you have done your best to do so. If necessary, you can start backup withholding (be sure to tell the contractor your intentions).
What If You Do Not File a 1099?
If you do owe 1099 forms and you are not issuing them to the IRS, you could be charged anywhere from $30-$100 for each missing form. If you are also not issuing them to the contractors, you could owe $250 or more (there is no upper limit) as an additional penalty for each.
Alan M Brown, CPA Can Help You Keep Up with Your 1099 Needs
Once you get a routine down with 1099s and start to understand their complexities, you should find issuing them to be straightforward in most cases. If you do need assistance understanding and issuing 1099-Misc forms, please give Alan M Brown, CPA a call at (760) 212-4993.