The IRS is not known for making things easy. For small business owners especially, tax time is generally filled with frustration, uncertainty, and probably a few extra hours at your kickboxing class. Here are the answers to 10 of the most common questions that many small businesses have when it comes to 1099 forms.
Which 1099 form do I use?
In all, there are 17 different types of 1099 forms issued by the IRS. For small business owners, the most important one is the 1099-MISC, which you’ll use to report the payments made to contractors and independent service providers. However, it may be worth reviewing the other sixteen 1099 forms to see if you’ll need to file any of those, as well.
How do I know if a worker is an employee or a contractor?
With the number of self-employed workers on the rise each year, the line between employees and independent contractors has become a little blurry. Let’s say that you hire someone to build a website, but once the website is complete, you decide to keep that person on board to update and maintain your site. Is this person still a contractor, or are they now an employee? Generally speaking, this differentiation is not based on how you pay your worker or if they work for you full-time.
The IRS uses three guidelines to differentiate:
- The perception of the relationship: If you and your contractor view your relationship as more of an employer-employee relationship, the IRS might just agree with you.
- Financial control: If you have any say in how the contractor manages his or her business, then that contractor may actually be an employee.
- Behavioral control: Most contractors do the tasks that you assign them in the way that best suits them. If you direct a contractor to follow your company’s procedures as they do their job, then he or she may be considered an employee.
What kinds of payments need to be reported?
The most obvious type of payment to report is what you pay to independent workers such as writers, web designers, and other contractors—including the guy you hired to cut the grass around your office. However, there are a few other things you’ll need to report via the 1099-MISC, such as:
- Payments made to unincorporated businesses that provided a service to your business. Think tech support services, consulting firms, website hosting services, and other unincorporated service providers.
- If you pay rent for office space, warehouses or anything else, you’ll need to report those payments on the 1099-MISC.
- If you award more than $600 in prize money to someone, that goes on a 1099.
- Healthcare and medical expenses paid to independent workers should be reported on 1099s.
- Whether they’re incorporated or not, you always need to issue a 1099 to attorneys.
What are the minimum payments that I need to report?
You’ve probably already learned that you only need to issue 1099-MISC forms if you’ve paid an independent worker or service provider more than $600 for the year. In most cases, you don’t need to issue 1099s for yearly payments under $600, but there are two exceptions:
- If you sell $5,000 worth of goods to a buyer or reseller that isn’t a permanent retail establishment, you’ll need to report it on a 1099-MISC form.
- Issue a 1099 if you’ve paid someone more than $10 in royalties.
What are the deadlines I need to know about?
No matter how you choose to send it—mail, e-mail, secure website, carrier pigeon—all 1099 forms need to be provided to your contractors by January 31. The exception to that rule is if the 31st happens to fall on a weekend, in which case you’ll need to deliver it to your contractors by the next business day.
When it comes to filing with the IRS, there are two deadlines. If filing by paper, submit your 1099s by February 28. Electronically filed 1099s can be submitted by March 31.
Do I need to file 1099s if I paid contractors electronically?
There’s a lot of misinformation surrounding this question, and that is partly because the rules on this are a little murky. The official ruling is that if you use an electronic payment service like PayPal or a credit card to pay a contractor or service provider more than $20,000 in one year and you make more than 200 payments to that contractor, then you do not need to furnish a 1099-MISC because the payment service will issue a 1099-K.
However, note that both conditions must apply. For instance, say you pay a contractor $25,000 in a year via PayPal, but you do it in 12 payments (not 200), then the 1099 will need to come from you, not PayPal.
What if I forget and file late? Is there a penalty?
No matter how much you say you’re sorry, the IRS will still penalize you for 1099s that are filed late! This penalty is based on the February 28th deadline, and it ranges between $30 and $100 per form (up to a maximum of $500,000) depending on how late you file.
How are W-9 forms related to 1099s?
When you hire an independent worker, the IRS requires you to have that contractor complete a W-9 form. You’ll then need to keep that form on file for at least four years. Although you don’t actually need to send completed W-9s to the IRS, their purpose is to help make tax time a little bit easier. This brief form gives you everything you need to know to issue a 1099—the contractor’s full name and address, their taxpayer identification number, and whether or not they’re incorporated.
Do foreign workers get 1099s?
Regardless of a person’s citizenship, any contractor that you hire to perform a service here in the United States should receive a 1099 form. If, however, a non-U.S. citizen performs the service outside of the United States, then you don’t need to issue a 1099.
Where can I get 1099 forms?
Because the IRS uses special paper to create 1099 forms, you can’t simply download a PDF from their website and print as many as you like. Instead, you’ll need to get your 1099 forms at one of the following places:
- Order them from the IRS directly, either online, by calling them or by stopping in at a local IRS office.
- Get 1099s from your accountant.
- Most major office supply stores sell 1099s and other tax forms in bulk.
Who would have thought that one simple little form could incite so many questions? Use this handy blog post as a starting place to help guide you next tax season—and come out looking like a pro!