You know that it has something to do with filing taxes, but what exactly is a 1099 Form? In short, a 1099 Form is an “information return” that reports all income earned through self-employment, interest and dividends, sales proceeds, and other miscellaneous income. There are several different types of 1099 Forms that account for the various types of income that’s earned throughout the year. As a small business owner, it’s easy to get lost in the hodgepodge of annual taxes and their procedures, but it’s necessary to know the basics in order to protect yourself and your business.
The 411 on the 1099
Let’s get down to the five Ws:
Who do I need to send a 1099 to?
The most common form that small businesses typically send out is the 1099-MISC. As a general rule, a 1099-MISC Form must be issued to anyone you’ve paid at least $600 to in professional services, rents, awards, or other income-related payments. However, unlike W-2s, 1099s are issued to contract workers, not full-time salaried employees. More on the different types of 1099s later.
What are the penalties for not issuing 1099 Forms?
As of 2016, small businesses that fail to issue 1099 Forms can result in penalties that range from $50 to $100 per form ($500,000 maximum per year), depending on how long past due the form is issued and how quickly the failure is corrected. If the issuing requirements are intentionally disregarded, the minimum penalty is $250 per form, with no maximum.
When do I need to issue 1099 Forms by?
Businesses need to send 1099s to all independent contractors by January 31. For filing information returns, all businesses need to meet the February 28 deadline. If you’re filing electronically, the deadline is extended to March 31.
Where can I get 1099 Forms?
You are required to use certified 1099 Forms that can be read by the IRS scanner. To obtain these forms, you can order them online from the IRS. You can also order them from certain office supply stores that provide authorized 1099s, or financial software can be used to create, send, and file 1099s. Be sure that you’re not downloading 1099-MISC Forms or sample forms from the IRS, as they are not permitted for use.
Why do I need to issue 1099s?
In order to avoid penalties and adhere to compliance laws, all small businesses need to properly issue and file 1099s. Be timely and be accurate. No one’s exempt from having to pay taxes, so it’s good practice to stay informed and follow federal requirements.
Prepare early for year-end tasks, and don’t scramble to meet deadlines. Set your business up for success by verifying that all employee and independent contractor information is accurate and that your financials are up-to-date.
If you’re like most people, you probably don’t want to deal with this at all. Bookkeepers can be a great resource around the 1099 process. Some bookkeepers (like BKE) will even do it all for you. Let us know if you’d like to schedule a consultation.
1099 Form Variants
There are several variations of 1099 Forms, and it’s helpful to know which form to use for what purpose. The most common type is arguably the 1099-MISC, which covers an array of miscellaneous income for independent contractors. The 1099-INT Form summarizes interest income, while the 1099-DIV summarizes dividends and capital gains for the tax year. Then, there’s the 1099-B which summarizes income from all stock sales and barter transactions. Another common form is the 1099-K, which reports all credit card sales. This form is usually used for retail and online products, or if you’ve been selling items through online marketplaces like Amazon, eBay, or Etsy. There are scores of other 1099 forms that the IRS provides. Although many of them may not apply to how your small business operates, it’s a good idea to review the different types so you know that you’re filing correctly.
What else you need to know as a small business owner
As a small business owner, there are several perks in working with contractors. By using a 1099-MISC Form to pay for services, you’re essentially telling the IRS that the worker is not an employee. In doing so, you’re not obliged to provide certain employee taxes like Medicare and Social Security, as you normally would for a regular full-time employee.
If you’re using independent contractors for your small business, here’s what to ask for:
Before starting anything, fill out a W-9 Form for each contractor, which includes their name, address, and Social Security number (SSN) or an employer identification number.
Clearly define the relationship between you and the independent contractor. Make sure you have a contract that outlines exactly what the service agreement is, and allow them to perform the work with little to no supervision or interference.
Steer clear of providing any benefit-type payments to the contractor. This includes health coverage, training, meals, or other perks.
Request invoices for all services. Ensure that the invoices clearly depict the contractor’s name, business name, and bank details.
Although preparing and filing 1099s can be time-consuming, it is a necessary effort. Make sure to ask your bookkeeper or CPA about important deadlines for filing, and to confirm that you’re properly filing for your small business. Working with a bookkeeper can also ensure that all of your financials are accurately tracked throughout the year, which can significantly reduce headaches come tax time.