Let’s start by explaining what it is. A 1099 is an informational return that is used to tell the IRS who paid whom, and how much they were paid. If XYZ Corporation hires Joe the Independent Landscaper to mow the company golf course, then the IRS wants to know how much XYZ paid Joe. That way, they can cross reference the 1099 to Joe’s tax return to make sure Joe declared all his income. (If Joe were an employee of XYZ Company rather than an independent contractor, then he would have received a W2 instead. In that case, the IRS would be able to cross reference the W2 to his tax return.)
So who needs to issue a 1099?
Basically, any business (including self employed individuals and non-profits) that pays independent contractors, service providers and other vendors – let’s call them all “Payees.”
Does your business need to issue a 1099 to every single Payee?
No.
You only need to issue a 1099 if the amount paid for the year was $600 or more.
Furthermore, you only need to issue it to Payees who are sole proprietors, partnerships, or LLCs – but not to LLCs who are taxed as S Corporations or C Corporations. In fact, you do not need to issue 1099s to any type of corporation.
As a business owner, how do you know whether or not the Payee will need a 1099?
I am so glad you asked.
The secret to staying out of trouble and avoid scrambling to figure it all out before January 31 when the 1099s are due to Payees is to INSIST on getting a Form W9 from the Payee – BEFORE YOU PAY THEM! This is when you have the most leverage. It can be hard to locate Joe the Independent Landscaper months after he has stopped mowing your golf course.
The W9 is a simple one page form filled out by the Payee. It will tell you what kind of entity the Payee is – a sole proprietor, partnership, LLC, or corporation. It will tell you the Payee’s legal name, federal tax ID number, and mailing address. If it turns out that you have to issue a 1099 you will need all this information. If it turns out you don’t, this is the piece of paper that proves it.
Not all types are payments are included on the 1099. The most common types of payments your business might be making that would require 1099s are rent that your business pays, interest on private loans, payments to subcontractors and independent contractors (including payment for parts and materials), commissions paid, and professional fees. Most payments are reported on a 1099-MISC, but some are reported on other types of 1099s (for instance, interest is reported on a 1099-INT).
You do not need to issue 1099s for payments of “merchandise, telegrams, telephone, freight, storage and similar items.” This is a quote straight from the IRS 1099 instructions. The only telegrams I have ever seen are in old war movies, and they are always sad news. But it’s good to know that if you spend $600 on telegrams, you will not need to issue a 1099.
As with any IRS rule, regulation, or requirement, there are exceptions to the general rules. Here are two that are common.
Attorney fees and settlement proceeds paid to an attorney: Report them on a 1099-MISC even if the attorney is incorporated. Fees go in Box 7, settlement proceeds go in in Box 14.
Rent paid: Do not report it on a 1099 if you pay it to a real estate agent.
Do not ask me why.
There are also specific requirements for certain industries, like fishing and medicine. You can read all the instructions on the IRS website by clicking here: Instructions for 1099 on IRS website
What happens if you don’t file a 1099 when you should have? If the IRS finds out, you will probably be fined. If you intentionally disregarded the requirement to file, the fine is $250 per form that you did not file.
You are supposed to file copies of the 1099s along with a summary form called a 1096 by February 28. If you file late, fines range from $30 to $100 per late form filed, depending on how late you are.
You may be wondering how the IRS knows if you were supposed to file any 1099s. They ask you. Right there on your income tax return. They ask if you were required to file, and whether or not you did. Since you do not want to lie to the IRS, your best bet is to issue the 1099s, file copies with IRS, and sleep soundly.
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