I 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
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.