1099-MISC For Dummies

Updated 10/30/2013

Get a completed Form W-9 before paying any independent contractorI got a ques­tion from some­body who read this blog entry and she said she could barely under­stand it at all. I had no idea.

So… (cornet flour­ish sounds,  “da tadada”) Intro­duc­ing 1099-MISC for Dum­mies.  If you are in busi­ness and pay other peo­ple for ser­vices, Form 1099-MISC & Form 1096 are prob­a­bly “tax” Forms you should be fil­ing. Why? Just like any other “tax” form there are penal­ties for not fil­ing them. If you like liv­ing on the edge, and sneer­ing at the tax man, you don’t have to read any fur­ther, this post is not for you. How­ever if just see­ing a let­ter from the IRS gives you the cold sweats, read on.

This blog is about the fundamentals.

  • What is a 1099-MISC?
  • Why does the gov­ern­ment want a 1099-MISC?
  • Can I print out blank Form 1099-MISC?
  • How long do I have to keep Form 1099-MISC?
  • Who must file Form 1099-MISC?
  • Who gets a 1099-MISC?
  • How do I get the infor­ma­tion to com­plete 1099-MISC?
  • What hap­pens if you don’t file 1099-MISC?

What is a 1099-MISC?

A 1099-MISC is like a W-2 for inde­pen­dent con­trac­tors, peo­ple who do work for a busi­ness but who are not employ­ees, own­ers, part­ners or shareholders.

The 1099-MISC and other doc­u­ments like it, 1099-INT you get from your bank, 1099-DIV you get from your bro­ker­age account, 1098 Home Mort­gage Inter­est state­ment you get from your mort­gage com­pany are called Infor­ma­tion Returns.  They are kind of like income tax returns except no money is paid to the gov­ern­ment when they are filed, but like income tax returns a busi­ness may be required to file them. They have due dates just like income tax forms, they have failure-to-file penal­ties just like income tax forms as well.

Like a tax return, there is no “infor­ma­tion return fairy” who com­pletes the form; the busi­ness, your business, has to obtain the form & file it with the gov­ern­ment, as well as give a copy to the peo­ple or busi­ness named in them. The gov­ern­ment gets a copy of all of the Form 1099-MISCs & a sum­mary of the all of the 1099-MISC Forms file on some­thing called a 1096 Annual Sum­mary and Trans­mit­tal of U.S. Infor­ma­tion Returns.

The per­son named in the 1099-MISC is sup­posed to get their copy about a month in advance of you fil­ing your copies, so they can dis­pute the amount reported, or get other errors cor­rected if they need to; if you have made an error on the form you are sup­posed to cor­rect it and re-issue it to the payee.  If you make a cor­rec­tion to forms that already been filed with the IRS, you have to send cor­rected copies to the them too.

A 1099-MISC basi­cally reports income received by a sin­gle per­son or busi­ness from your business-you should be able to get the total amount paid from your books.

Why does the IRS want 1099s?

The IRS uses 1099 infor­ma­tion to look for peo­ple who are not report­ing all the income they received in their busi­ness, also known as “tax cheats.” This mis­sion is very impor­tant to the IRS, as they esti­mate 50% of all income not reported on any form to the gov­ern­ment is never reported on income tax returns.  If you pay all of your taxes, then tax cheats should piss you off. Aside: The IRS gets $10 back for every dol­lar they spend look­ing for tax cheats, which is a heck of a rate of return when you think about it; need­less to say if you are a tax cheat they are look­ing for you.

NOTE: Forms 1099 & Form 1096 Use Spe­cial Ink A word about the blank 1099-MISC forms, and the Form 1096 too-they have a spe­cial mag­netic ink so that  the gov­ern­ment can feed them to some sort of auto­matic scan­ner to read the infor­ma­tion on them; you have to get these forms from the gov­ern­ment or pur­chase them from ven­dors; you can­not down­load and print blank 1099s out, because your inkjet printer does not have the right kind of ink.  In gen­eral I rec­om­mend a busi­ness order them a least a month before the end of the year.   NOTE: If you must issue more than 250 Form 1099s the IRS requires you to e-file Forms 1099 & Forms 1096

Who must file a 1099-MISC?

To answer that ques­tion and oth­ers we need to find out more about you.

1.   Are you in busi­ness? If you are not in busi­ness then you do not need to file a 1099-MISC.

2.  Does your busi­ness pay any­one who is NOT an employee, owner, part­ner, share­holder for ser­vices to be per­formed on behalf of the busi­ness? By ser­vices I mean ALL kinds of ser­vices: plumb­ing, paint­ing, lawn care, auto-repair, education, printing, account­ing, deliv­ery, legal fees, sales etc.  If not then you do not need to file a form 1099-MISC. The empha­sis here is on ser­vice providers, NOT peo­ple who sup­ply you with goods.  e.g. If you buy off-the shelf soft­ware from a busi­ness, they have sup­plied you with goods-no 1099 is required, but if you hire some­one to write an ap for you, they have pro­vided you with a service-a 1099 maybe required.

3.  If your busi­ness does pay for ser­vices per­formed by inde­pen­dent con­trac­tors, do you pay any of them more than $600 per year via cash, check, barter (or some other method NOT reported via 1099-K)? If the answer is no, then you might not need to file a 1099-MISC.  If you paid this con­trac­tor via credit card, debit card or third party payer like Pay­pal, then the income is reported on a 1099-K via the mer­chant or third party payer and you do NOT have to sep­a­rately report these pay­ments. If the answer is yes, then you prob­a­bly need to issue a 1099-MISC to each con­trac­tor that you did pay more than $600 via cash, check or barter, as well as fil­ing the 1099-MISCS and 1096 with the Depart­ment of the Treasury

There are a few other sit­u­a­tions where a 1099-MISC is required, read down on this page to see what they are; rent is a sit­u­a­tion where a 1099-MISC might be required, as are pay­ments of more than $10 for roy­al­ties, and if some one pro­vides you with more than $5000 in direct sales etc.

How do I get the infor­ma­tion to com­plete the 1099-MISC?

If your busi­ness does pay a spe­cific indi­vid­ual or busi­ness more than $600 in ser­vices per year you need to get more infor­ma­tion from that busi­ness via Form W-9, and please try to get it before you start pay­ing them. Form W-9 pdfs can be down­loaded & printed out from irs.gov.  When com­pleted by the other busi­ness, the Form W-9 will give you:

  • What kind of busi­ness: sole pro­pri­etor, LLC, part­ner­ship, cor­po­ra­tion etc. they are
  • Their busi­ness’ Tax Iden­ti­fi­ca­tion Num­ber (either a social secu­rity num­ber or employer iden­ti­fi­ca­tion num­ber), and
  • Their business’ address.
  • They can indi­cate via a attes­ta­tion that you do not have to do backup with­hold­ing on them
  • Their sig­na­ture on the attes­ta­tion, which has to be dated as well.

You do NOT send the Form W-9 in; you keep it for your records. As for the amount you paid them and how you paid it, that infor­ma­tion should be in your books.  You do have a set books for your busi­ness don’t you?

More infor­ma­tion the types of busi­nesses who will receive a 1099-MISC.

Gen­er­ally if a business:

  • is sole pro­pri­etor­ship / inde­pen­dent busi­ness person,
  • Lim­ited Lia­bil­ity Com­pany (LLC) or
  • part­ner­ship,

you will have to cre­ate a 1099-MISC for them,

  • also if the busi­ness is incorporated, AND the cor­po­ra­tion is a med­ical, health care or legal orga­ni­za­tion you will have to cre­ate a 1099-MISC for them too.

Most other cor­po­ra­tions are exempt from 1099-MISC infor­ma­tion reporting-but they have the option of indi­cat­ing that on the W-9 so it is always best if you get a w-9 form every busi­ness you do busi­ness with, even from busi­nesses with Inc. after their name. Remem­ber get the com­pleted W-9 from them before you start to do busi­ness with them, or at least before you pay them.

How long do I need to keep the 1099 & the W-9?

Most pre-printed 1099-MISC forms come with a copy you can print out and keep with your records, but if not, make a copy of all infor­ma­tion tax returns you file and store them with your records.

In gen­eral you need to keep the 1099-MISC and the Form W-9 4 years from the due date or fil­ing date, whichever is later, of the tax return for the year in ques­tion.  In other words if you file your cor­po­rate taxes for a fis­cal year end­ing in 2013, on June 16, 2013 — you would need to keep the W-9s received in 2012 & 2013, the 1099-MISC payer copies as well as a copy of the asso­ci­ated 1096 until June 16, 2017.

How­ever if you never file a spe­cific Form 1099-MISC, even if you file oth­ers, the IRS can treat that 1099-MISC as infor­ma­tion return that was never filed.  The statute of lim­i­ta­tions does not begin to run until you actu­ally file that 1099-MISC with a 1096.

Exam­ples of whether a 1099-MISC is required (or not required)

I paid some­one to paint my per­sonal res­i­dence via cash, check or barter, do I need to send them a 1099-MISC?

Prob­a­bly not, this pay­ment was likely for per­sonal ser­vices not busi­ness services.

What if I traded John Doe painter to paint my per­sonal residence, and I did lawn care for his business?

In this case if the value of lawn care ser­vices you pro­vided to John Doe’s paint­ing busi­ness exceed $600 in one year, then John Doe should have you com­plete a Form W-9 for your lawn care busi­ness. John Doe’s paint­ing busi­ness should also issue a 1099-MISC to your lawn care busi­ness for the value of those ser­vices, unless your lawn care busi­ness is legally incor­po­rated. You would not issue John Doe painter a 1099-MISC for paint­ing your per­sonal res­i­dence as this pay­ment was not for your lawn care busi­ness; it was for your per­sonal use.

What hap­pens if some­one refuses to com­plete a W-9?

Jane Doe an inde­pen­dent book­keeper, does not want to com­plete the W-9, but I know I will pay her more than $600 this year via cash, check or barter.  What do I do?

In this case your busi­ness is sup­posed to do backup with­hold­ing of 28%. This means if Jane’s bill is $300 you are only sup­posed to give her $216; the other $84 you are sup­pose to pay to the US Trea­sury AND you are sup­posed to report the total amount with­held via Form 945 at the end of the year. You heard me right; if indi­vid­ual or busi­ness refuses to give you this infor­ma­tion you are sup­posed to col­lect taxes for the government, report those taxes to the gov­ern­ment, and for­ward the taxes you col­lect to the gov­ern­ment.  Gen­er­ally the threat of backup with­hold­ing is enough to get an inde­pen­dent con­trac­tor to com­plete the W-9.  Remem­ber, get the com­pleted W-9 or their record of refusal before you start your busi­ness rela­tion­ship with them, it can save on headaches later on.  In this sce­nario you might want to hire some­one other than Jane Doe; find a book­keeper who will fill out the W-9 and save you all this backup with­hold­ing hassle.

I paid Joe Blow $1000, but I never got a com­pleted W-9 from him, what do I do now?

From the IRS stand­point this event should never hap­pen, that said…

First try to get the infor­ma­tion from Joe Blow any way you can.  If you can get a com­pleted W-9 or at least the address and tax­payer iden­ti­fi­ca­tion num­ber from him, you will have at least the min­i­mum amount of infor­ma­tion to com­plete the payee sec­tion of the 1099-MISC.  You may want to send the Form W-9 return receipt requested so that you have a record of Joe Blow’s refusal to sup­ply the infor­ma­tion. Fur­ther­more if Joe Blow does refuse to com­plete the W-9 you can report him to the IRS.

As I said the IRS basi­cally thinks this should never hap­pen, so here is some advice that is worth exactly noth­ing. If you can’t get this infor­ma­tion, com­plete the 1099-MISC any­way with what ever infor­ma­tion you have, you may want to write “refused” in the area of the tax­payer iden­ti­fi­ca­tion num­ber, or “not avail­able” per­haps. Is this going to keep the IRS from com­ing back to you for the 28% backup with­hold­ing you did not per­form… maybe, maybe not.

In this sce­nario, when you can’t get the W-9 infor­ma­tion from a ven­dor, but you go ahead and do busi­ness with them anyway, you really should NOT be deduct­ing the $1000 pay­ment as a busi­ness expense on your taxes. In a way you are pay­ing the inde­pen­dent contractor’s tax for them, because you will be report­ing their income as yours.

Do I have to com­plete Form W-9 if I was paid less than $600, or I was paid via credit card, debit card or Paypal?

Short answer is yes, you are sup­posed to fur­nish this infor­ma­tion. It says so right on the form-if you do not fur­nish your tax­payer iden­ti­fi­ca­tion when a valid request is made, there is a penalty of $50 each time you refuse; of course one might won­der if this sce­nario actu­ally con­sti­tutes a legally valid request… not a lawyer, I can’t answer that.  On the other hand, if John Doe Painter does not have to com­plete Form 1099-MISC for you because he paid you less than $600, or paid you via debit card, credit card or Pay­pal, you might try writ­ing him a let­ter ask­ing him why he needs this infor­ma­tion since he does not have to issue you a Form 1099; he might acknowl­edge that fact and you are done.  In gen­eral though it is by far less has­sle just to com­plete the form and be done with it.

What if I don’t want to file the forms 1099-MISC and 1096?

There is $100 fine for each 1099-MISC you should have filed but didn’t, up to $1.5 mil­lion or $500,000 for cer­tain small busi­nesses.  Also the gov­ern­ment may come back to your busi­ness and demand you pay all the contractor’s taxes on the amounts you paid them. If you will­fully failed to file the 1099-MISCs and asso­ci­ated 1096, mean­ing you knew you should file them and chose not to, well the IRS calls this sce­nario Will­ful Dis­re­gard; the penalty increases to $250 per infor­ma­tion return and there is NO upper limit on the fine.

So if you decide not to file the 1099-MISC and 1096, you get to pay the contractor’s taxes and yours and a penalty, plus inter­est.  Wow, you are very gen­er­ous.  If you went ahead and deducted those pay­ments as busi­ness expenses, there could be addi­tional penal­ties for under report­ing of income etc.

So either issue the 1099’s and deduct what you paid to the inde­pen­dent con­trac­tor, or don’t deduct what you paid the inde­pen­dent con­trac­tor and don’t issue the 1099’s. Mat­ters not to your book­keeper or accoun­tant, you pick. How many people’s taxes are you will­ing to pay?

See us before the IRS comes call­ing.  Small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help with 1099-MISCs, or other ser­vices,  Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

(602) 717‑0763

2 Responses to “1099-MISC For Dummies”

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  1. bofield8 says:

    I’m a new ED of a non-profit and use con­sul­tants. I am unable to find the 1099’s for the con­sul­tants we’ve used in 2012 and are in the midst of an audit. Where can I go quickly to get copies of those consultant’s 1099’s?

  2. Howdy bofield8. In the­ory the per­son who took care of this oper­a­tion in 2012 should have copies of the 1099s they sent in. Most ven­dors of the multi-part forms give you a copy to keep with your records. Of course this assumes that your non profit actu­ally filed the 1099s and 1096 like they were sup­posed to. Other than that, maybe you can obtain a tran­script from the IRS. Unlike the Forms W-2 and W-3, the 1099 Misc are filed with the Depart­ment of the Trea­sury. http://www.irs.gov/uac/Tax-Return-Transcripts. Good luck.

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