1099 Reporting Requirements for a Small Business

The IRS has an information program that requires businesses to file certain information returns. The various 1099 forms are part of this program. Businesses are required to issue 1099s for various types of payments made to independent contractors, professional service providers, and other individuals and entities. The IRS matches the 1099 information to the applicable party to ensure that the payments received are properly reported as income. It is important for small businesses to comply with the 1099 reporting requirements; the IRS imposes tough penalties for noncompliance.

Reporting Requirements

There are numerous 1099 forms used to report a variety of transactions. However, the most common 1099 for a small business is form 1099-MISC, which is used to report miscellaneous income payments to nonemployees (contractors). This 1099 form is due to the contractor before January 31 and to the IRS before February 28 of the following year. Copies should also be sent to states where required. The business must also file a form 1096, which summarizes the 1099 MISC form information. The form 1096 and the 1099s are filed with the IRS together as a package.

There should be a 1099-MISC filed for each person paid, as follows:

---Payments of $600 dollars or more to contract employees, independent contractors and/or consultants, physicians, physicians' corporations or other providers of health or medical services, purchases of fish for resale and crop insurance proceeds.

---Payments of $10 or more for royalties, substitute dividends and tax-exempt interest.

---Payments of any amount to attorneys and crew members of fishing boats.

---Payments of any amount to persons subject to the backup withholding rules.

---Sale of $5,000 or more of consumer products for resale anywhere other than a permanent retail establishment.

Penalties for Late Filing

Forms 1099 MISC filed after the return due dates are subject to the following penalties:

---For corrections made within 30 days after the filing date, the penalty is $15 per 1099, with an annual maximum of $25,000 for small businesses.

---For corrections made between April 1 and August 1 of the calendar year in which the 1099 was due, the penalty is $30 per 1099, with an annual maximum amount of $50,000 for small businesses.

---For corrections after August 1 of the year the 1099 is due, the penalty is $50 per 1099, with an annual maximum amount of $100,000 for small businesses.

Employee Versus Independent Contractor

It is often difficult for small businesses to determine whether a worker is an employee or an independent contractor. As a general rule according to the IRS, "a worker is considered an independent contractor if he or she is subject to the direction or control of another for the purpose of outlining the work to be accomplished, but not as to the means and methods by which the work is accomplished."

The IRS often challenges employment classification. The 20 key factors listed in Revenue Procedure 85-18 are used by the IRS to determine worker status. If the IRS successfully challenges a worker's classification, the small business would be responsible for withholding taxes and would be subject to fines and penalties for failing to withhold and pay over the taxes due.

Statutory Emplyees

Some workers are automatically classified as employees by law. The business must first make a determination as to whether the worker is a "statutory employee" or a "statutory independent contractor." If the worker does not fall under either of these categories, then the business must evaluate the worker's status under the 20-factor test.

Conclusion

Noncompliance with the 1099 reporting requirements can result in serious consequences for small businesses. If there is any doubt about the business's capability to handle the 1099 reporting requirements, outside professional help should be obtained.

References

• IRS Publication 334: Tax Guide for Small Business

Resources

• IRS: Guide to Informational Returns