Time to Send Out 1099s: What to Know
It's that time again to send 1099s out to your vendors. Here's a breakdown of what to do.
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The 1099 tax form can seem mysterious. Business owners guess at its rules and requirements, and tracking changes to the procedures can be so exasperating that some entrepreneurs just give up and file nothing at all. (This can be dangerous financially, as penalties can add up quickly.)
But the 1099 doesn't have to be complicated. To help simplify things, here's a rundown of the basics.
To whom are you required to send a 1099?As a general rule, you 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 payments 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, and you'll send it to any individual, partnership, Limited Liability Company, Limited Partnership or Estate.
What are the penalities?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.
What are the exceptions?
The list of exceptions is fairly lengthy, but the most common is that you don't need to send a 1099 to corporations or for rent payments to real estate agents (typically property managers -- yet they are required to send them to the property owners). Additionally, you don't need to send 1099s to sellers of merchandise, freight, storage or similar items.
Lawyers get the short end of the stick here. 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 1099 if you paid them more than $600.
The W-9 is your best friend
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 and Tax ID number, and it'll also require that the vendor indicate whether 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 procedureRegrettably, you simply can't go to IRS.gov, 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 and pick them up at an IRS service center -- or grab them while supplies last from the post office or another outlet. Next, don't forget to compile all of your 1099s and submit them to the IRS with a 1096 form by the following month.
The deadlinesFinally, you are required to issue and essentially mail out all of your Form 1099s to your vendors by January 31. Then you have to send in the transmittal Form 1096 to the IRS before February 28. For those of you that 'outsource' this service, your accountant with the proper system can actually submit the 1096 and stack of 1099s electronically by March 31. Don't forget as well, that depending on state law, you may also have to file the 1099-MISC with the state.
What about foreign workers?
If you hire a non-U.S. citizen who performs any work inside the United States, you'll need to file a 1099. It is your responsibility to verify that the worker is indeed a non-U.S. citizen and performed all work outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return Form W-8BEN.
Even if you miss the first 1099 deadline of January 31, contact your CPA and make sure to finish up the process as soon as possible. If you can show reasonable cause for your delay, it could save you major penalties that could arise from not filing the forms on time. Moving forward, make sure to get a Form W-9 from all your vendors before sending out payments. This will save you a lot of headaches next January so you don't have to track down their mailing addresses or EINs.
The good news: Most accountants will provide this service affordably and efficiently for you during the month of January so you can stay focused on your New Year's resolutions and making money rather than filling out paperwork.