Your Guide to Understanding 1099s
The Form 1099-MISC…generally recognized as the form that you, as a small business owner, send to independent contractors who you pay over $600.
It’s true that this is the most common use for the form, but there is a little more to it than that.
You should probably be sending them to some individuals and businesses that you haven’t been sending them to.
Read on to learn more about what the 1099-MISC is, who you should be sending it to, when they are due and more.
There are actually a lot of things this form is used for.
I will focus on the few items most small business owners may need to be concerned with.
The most commonly used box on the 1099-MISC is Box 7 for non-employee compensation.
This is where you report the amounts you pay your contractors and other service providers who are not your employees for services provided.
This includes other businesses that are not incorporated.
But as a small business owner, you may also need to take a closer look at box 1 for rent.
Rent should be reported in Box 1 if you pay more than $600 to rent office space or other real estate and you pay the owner directly.
If you pay a management company or property manager and they remit the payments to the owner then you do not need to report your payments on a 1099.
The management company or property manager becomes responsible for reporting the payments.
A little further down on the form, Box 14 is used for gross proceeds paid to an attorney.
However, this should not be confused for payments made for services provided and can usually be ignored.
Box 7 should still be used to report payments to attorneys for services provided.
Box 14 is commonly used for settlement proceeds paid to attorneys and, again, can usually be ignored by small businesses.
Who Gets a 1099?
As a small business owner, you should be sending a 1099-MISC to any individual or unincorporated business that you pay more than $600 to for services or rent.
This is where many small businesses fail to comply.
You aren’t only required to send a 1099 to individual independent contractors.
If you pay a Company that isn’t incorporated (except law firms, which you send them to regardless of whether they are incorporated) more than $600 for services or rent, you are supposed to send them a 1099-MISC.
How to File a 1099-MISC
If you’ve determined there is, or will be a 1099-MISC filing requirement for payments you’ve made in your business, the first thing you should do is have the individual or business you paid fill out a W-9.
This form is a formal request for their taxpayer identification number (social security number or Federal EIN), which you will keep in your records for when it is time for you to complete a 1099-MISC.
Then, when you are ready to send the 1099, you will have the information you need.
The reality is, you are probably capable of filing these forms yourself.
However, it is usually not cost effective to do it yourself by hand.
You have to use special, preprinted copies of the form, and they are usually only sold in bulk.
You cannot just print off the form from the PDF on the IRS website.
The official forms are scannable and must be used.
So, if you want to file your 1099-MISC forms yourself, the easiest way to do it is to use a service like this.
Or, if you are using a bookkeeping software like Quickbooks, you can complete them using the software and efile them.
Of course, you can also talk to your accountant or payroll company if you have one.
They should be able to help you file your 1099-MISCs and the 1096 that you send with your 1099s.
The Form 1096 summarizes the number of 1099s you are submitting and should be submitted with any 1099(s) you file.
If you are reporting amounts in box 7 for non-employee compensation, which is what you are likely filing a 1099-MISC for, it should be filed by January 31.
For other payments, the forms should be filed by February 28.
Penalties for Noncompliance
If you fail to comply with the 1099 filing requirements, the penalties can add up quickly.
If you file a 1099 late, but within 30 days of the due date, the penalty is $50 per form.
For Forms filed greater than 30 days late, the penalty starts at $100 per form and increases to $530 per form, depending on how late you are.
On top of the penalty, you’ll owe interest as well based on how late you are.
So, be sure to comply if you don’t want to be subject to these penalties and interest.
Keep in mind, you only have to file 1099-MISC forms for payments you made for services.
If you paid by credit card or used a third party payment service like Paypal, you are not responsible for filing a 1099-MISC.
The credit card companies or third parties become responsible for filing 1099s for these payments (they use a Form 1099-K).
So, one way around having to file 1099s when it is an option is to pay your independent contractors using a service like Paypal.
It’s also worth noting, you don’t have to wait until January to file send your service providers a 1099.
If you pay an individual or business for services and know you won’t pay them anymore during a year, you can issue their 1099 after they provide the service.
Keeping all this straight can be challenging and feel overwhelming at times.
I am here to help.
If you are a small business owner, sign up for my email list to get my best tips and advice on understanding and paying less taxes.