Over the past few years there have been a number of changes and updates regarding the reporting rules for the mysterious 1099-Misc Forms. I say “mysterious” because many business owners simply guess as to what the rules are and oftentimes get exasperated and just give up choosing to file nothing at all. This can be a dangerous result as the penalties can add up quickly.
First, the general rule is that business owners must issue a Form 1099-MISC to each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099s for payment made for personal purposes. You are required to issue 1099 MISC reports only for payments you made in the course of your trade or business.
The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum. Bottom line, the penalties can add up!!
Here are the basics you should know.
- Who are you required to send a Form 1099? You are required to send Form 1099 to vendors or sub-contractors during the normal course of business you paid more than $600, and that includes any individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or Estate.
- Who are considered Vendors or Sub-Contractors? Essentially, this is a person or company you have paid for services that isn’t your employee.
- What are the exceptions? The list is fairly lengthy, but the most common is that you don’t need to send a 1099 to:
- Vendors operating as S or C-Corporations (you’ll find their status out when you get a W-9…see below)
- Sellers of merchandise, freight, storage or similar items.
- Payments of rent to or through real estate agents (typically property managers). However, keep in mind you need to issue a 1099 to a landlord you are paying rent, unless they meet another exception.
- Don’t worry about credit card payments and Paypal. The IRS allows taxpayers to exclude from Form 1099-MISC any payments you made by credit card, debit card, gift card, or third-party payment network such as PayPal. (These payments are being reported by the card issuers and third-party payment networks on Form 1099-K.)
- Lawyers get the short end of the stick. Ironically, the government doesn’t trust that lawyers will report all of their income, so even if your lawyer is ‘incorporated’, you are still required to send them a Form 1099 if you paid them more than $600.
- The W-9 is your “best friend”. Some of you may be frustrated that you don’t have the information you NEED to issue the 1099. One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor’s mailing information, Tax ID number, and also require them to indicate if they are a corporation or not (saving you the headache of sending them a 1099 next year). You can download a W-9 here.
- The procedure. Regrettably, you CANNOT simply go to www.irs.gov and download a bunch of 1099 Forms and send them out to your vendors before the deadline. The form is “pre-printed” in triplicate by the IRS. Thus, you have to order the Forms from the IRS, pick them up at an IRS service center, or hopefully grab them while supplies last from the post office or some other outlet.
- Deadline to Payees. Taxpayers are required to issue and mail out all Form 1099s to vendors by January 31st. (Wish you would have kept better records when paying folks during 2015?)
- Deadline to IRS. Next, don’t forget you have to compile all of your 1099s and submit them to the IRS with a 1096 by January 31st as well (NOT the end of February- the old rule). Also, depending on state law, you may also have to file the 1099-MISC with the state. Sounds like fun…right? (This is where delegating the task to your accountant may come in helpful).
- What about foreign workers? Also, if you hire a non-U.S. citizen who performs any work inside the United States, you would need to file the 1099. It is your responsibility to verify that the worker (1) is indeed a non-U.S. citizen, and (2) performed all work inside or outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN.
- Procedures for 2017. Moving forward this year, make sure to get a Form W-9 from all your vendors before they can get paid. This will save you a lot of headaches next January so you don’t have to track down their mailing addresses or EINs.
Don’t ignore the 1099 or the process and get with your CPA to make sure to finish up the process before the end of January. This could save you major penalties if you get caught not filing the Forms and you can show reasonable cause for your delays.
If there is any good news, our office can provide this service affordably and efficiently for you so you can stay focused on your New Year’s Resolutions and your updated Marketing Plan making money rather than filling out paperwork. Our fee is $35 for the 1096 and $5.00 per 1099…so it isn’t that expensive and if you need support or have questions, please contact Josie Stewart in our office for this service at 435-865-5866 or email her directly at [email protected].
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.