It’s the end of the year and time to think about closing the books and working on taxes. One of the many tax documents small businesses need to concern themselves with is a Form 1099. A 1099 is much like the W2 you used to receive as an employee, but the 1099 is given to independent subcontractors, or freelancers, as a record of the income you have paid them over the previous year. The IRS likes to know who made what every year so they can get their cut!
The 1099, like the tax code in general, can seem a little confusing and overwhelming. There are more than a dozen different types of 1099 forms. They all start with 1099 and then have a suffix denoting the specific type of form. The one you will deal with the most is the 1099-MISC. The ‘MISC’ stands for miscellaneous. This type of 1099 deals specifically with money you’ve paid to independent contractors during the course of business. Here are the three you need to know for filing a form 1099-MISC.
Step One – Business Entity
First of all you have to be a business. If you’re reading this I assume you are a small business operating under US tax laws. If you are an individual conducting your own personal affairs then issuing 1099 forms to others is not necessary. You may still receive them from others but generally you will have no need to issue them.
Step Two – Who are they?
There are generally three categories, from an IRS perspective, of entities you will write checks; employees, independent contractors and corporations. Of the three, only independent contractors will receive a 1099, generally speaking. The larger problem is indentifying who is an independent contractor.
If you have full or part time employees working directly under your control then you should be paying them a salary and issuing a W-2 form at the end of the year. Employees are defined as people performing services to your company over which you have direct control and you are their only source of income. You cannot claim an employee regularly working for you as an ‘independent contractor.’ Many people do this even though it is not legal. Be careful, the IRS has made an effort in recent years to crack down on this practice. If you are confused about whether someone is an employee or an independent contractor, consult your attorney or accountant.
To identify a corporation, it’s a good idea, and sometimes necessary, to request a W-9 form from anyone you pay money. This is merely an informational form the IRS provides. It does not need to be filed with the IRS. It merely tells you what the status of this person or corporation is and provides you with their tax id number.
If W-9 confirms they are a corporation with an official tax id number from the IRS then no further tax reporting action is necessary on your part (see exception below). If they’re a sole proprietor or independent contractor working under their Social Security number then a 1099 is required provided you paid them enough money during the course of the year.
There are a few minor exceptions to 1099’s and corporations. You are required to send 1099 forms to the following types of corporations that provided services for you:
- Legal (lawyers)
- Medical (doctors & other health institutions)
- Health Care (long term care or hospitals)
- Fishing (this one is a mystery to me!)
For the most part, you will not need to issue a 1099 to anyone you paid less than $600 as an independent contractor. The only exception to this is if you paid more than $10 in royalties to someone or a corporation. Just about any category of expense to an individual will count as needing a 1099.
Be careful not to mix business with personal. It gets a little tricky if you’re using your home as a place of business and some of the services overlap. For example, you have a home office and a cleaning person. That person comes into your home once a week and cleans your house and home office. If they come frequently enough and you give them enough money during the course of the year then you may have to issue them a 1099. The key is that technically you cannot pay them 100% of the cleaning fees from your corporation. It may seem like a great perk to have your business pay for the house cleaning but under audit it would be frowned upon. You will need to separate the payment to that person between business and personal to keep yourself above board in the eyes of the IRS. If after separating the expenses you find that the cleaning person received more than $600 from your business, a 1099 would be required. As mentioned above, this is only if that person was an individual and not working as a corporation.
As always, if the taxes for your small business get too complicated or you’re in over your head, seek professional help! Blatant disclaimer – We are not tax professionals. Seek the help of a qualified CPA or lawyer.