Prepare a 1099 for a Contract Worker

When you pay at least $600 in compensation for work or services done by a person who is not an employee of your trade or business, you probably need to prepare a 1099-MISC.

Difficulty:

Moderate

Instructions

Things You'll Need

• Typewriters
• File Cabinets
• Postage Stamps
• Ballpoint Pens
• Envelopes
• File Folders
• Office Software
• Spreadsheet Softwares

1. Determine you paid $600 or more to a contract worker during the tax year. Include only payments made in the course of your trade or business; personal payments are not included. Include payments made directly to the worker for parts and materials.

2. Obtain form 1099-MISC. It is titled "Miscellaneous Income."

3. Write your business Employer Identification Number (EIN) or your Social Security number as the payer's federal identification number.

4. Write the worker's Social Security number as the recipient's identification number.

5. Write the amount of money you paid to the independent contract worker in box 7, titled "Non-employee compensation."

6. Write any federal or state income tax withholding you have done for the worker in box 4 or 11. It is unlikely you have withheld income tax for the worker.

7. Fill in your name, address and phone number or that of your business.

8. Fill in the worker's name and address.

9. Write your state in box 12. Two-letter state abbreviations are preferred.

10. Give or mail copy B and copy 2 of the 1099-MISC to the worker no later than January 31 of the year following the one during which the payments were made to the worker.

11. Send copy 1 to the tax revenue department of the worker's home state by February 28. This is not necessary if that state has no state income tax.

12. Send copy A to the IRS along with form 1096 by February 28. You have until March 31 to file copy A and Form 1096 if you file them electronically.

13. Retain copy C in your records.

Tips & Warnings

• Form 1096 is a summary of the information returns you are sending the IRS. Use only one form 1096 for all of your 1099-MISCs. You will need to include your name, address and phone number; your EIN or Social Security number; the total number of 1099-MISCs you are filing; the total of any federal income taxes you withheld for contract workers; and the total amount you paid to contract workers. Check the box titled "1099-MISC."

• There are three 1099-MISCs on a sheet. Each of these three forms has five copies: copy A, copy 1, copy B, copy 2 and copy C. It is preferable to type the information on copy A, but it is acceptable to write in bold ink. The other copies are made of self-duplicating carbon paper. Obtain the 1099-MISC and the 1096 from an IRS office.

• If you type or write too lightly, some of the carbon paper duplications will not be legible. Copy C, the copy for your records, will be the lightest.

• Do not prepare a 1099-MISC for a worker who is your employee. This form is for non-employee compensation. You need to be aware of the rules distinguishing an employee from a non-employee. You have obligations to an employee that you must meet and that the IRS takes very seriously.