Many of us hear the term “1099” or “Form 1099” tossed around a lot–especially at the end of the year. Many of us know it has something to do with income tax, especially if you’re involved in your own business. Typically we know enough to realize that if someone’s going to “1099 you” (give me a 1099), it doesn’t feel good because it means you’re “on the grid”.
The General Rule:
If you’re a business, and you pay someone for services (not goods) $600 or more in the course of your business during the calendar year, then you are required to present them with a Form 1099 (see below for some exceptions). These payments are commonly referred to as “Contractor” or “Contract Labor” payments. This is a requirement of the Internal Revenue Service, and it is a means of income reporting on individuals and businesses.
For example, let’s say a contractor is building a home for a residential home buyer. He may hire and electrician to complete that portion of the home. If he pays the electrician $600 or more, he must present the electrician with a Form 1099 by January 31st of the following year.
Let’s switch up this example a little: does the home buyer have to provide a Form 1099 to the contractor? No, because the home is for personal use; it is not being built in the ordinary course of business.
Some Exceptions
You do not provide a Form 1099 to an employee (they receive a Form W-2). Why is this classification important? See “Employee Misclassification“. And generally you do not have to provide a Form 1099 to Corporations, but there are some exceptions as follows:
- Medical and health care payments (such as for pre-employment physicals)
- Fish purchases for cash
- Attorney’s fees
- Gross proceeds paid to an attorney (such as for legal settlements)
- Substitute payments in lieu of dividends or tax-exempt interest
- Payments by a federal executive agency for services
Why Do It?
In general, Form 1099 indicates the payee’s name, tax identification number, payment amount, and type of payment. This notifies the payee of the amount being reported to the IRS, and it reminds them to include it appropriately on their tax return.
A copy of the Form 1099 must be sent to the IRS, with a summary of all the Forms 1099 the taxpayer has distributed, on what is called a Form 1096. This notifies the IRS to be looking for the associated amount on the payee’s tax return. This is what is meant above by “on the grid”.
What if I Don’t Do It?
The penalty for not issuing (or inappropriately issuing) a Form 1099 ranges from $30 to $100 per Form; however, the penalty for intentional disregard is a minimum of $250 per Form. Intentional disregard is measured by the facts and circumstances, but failure to issue multiple Forms 1099 can be considered intentional disregard.
What Do I Do Now?
One of the most important things you will need to do is acquire the payee’s taxpayer information. This should be acquired at the beginning of the relationship (as you can imagine, it’s hard to acquire after you’ve already made payment to the payee). This information is acquired by presenting the payee with a Form W-9 (“Request for Taxpayer Identification”)—yup, there’s a (sometimes strangely) numbered IRS form for just about everything.
The payee completes the Form W-9 with their name, address, and taxpayer identification number. It is important to use Form W-9 as the payee is required to sign the form attesting to its validity. This helps protect you if the payee provides incorrect information. As a client of E. Daniel Miller, CPA, PC, you can copy and paste the following link in an email to your payee, which will allow them to complete the form electronically: Complete Form W-9 Electronically. The form will automatically come to our Firm once completed. You are also welcome to email payroll@edanielmillercpa.com for a form to print.
If You Are a Monthly Payroll Client
If you are a monthly payroll client, then chances are your Forms 1099 and Summary 1096 filings are included in your monthly service. This is a wonderful aspect of our payroll service for businesses. Contact us at payroll@edanielmillercpa.com or (888) 734-3933, and we’ll be happy to check your agreement.
If You Are Not a Monthly Payroll Client
If you are not a monthly payroll client, then do not worry as we can still prepare your Forms 1099 and Summary 1096 for you. Fees are dependent on the number of Forms required, and we will be glad to provide a quote. Please contact us at payroll@edanielmillercpa.com or (888) 734-3933. And of course, you may want to consider using our payroll service, as Forms 1099 and Summary 1096 are typically included in this service (no additional year-end fees).