A 1099 is a tax form that business owners issue to the Internal Revenue Service as well as the independent contractors and others that the business paid during the tax year. Understanding the rules governing the issuance of 1099s can help you determine whether or not you or your company needs to issue these tax forms. Failing to send out the proper 1099s can result in significant penalties.
In most circumstances you must complete 1099s for any person that you pay more than $600 in a tax year. You will report this payment by completing and sending a 1099 to the Internal Revenue Service as well as to the recipient of the payment. If your company pays royalties, you will also need to issue a 1099 to any person receiving more than $10 in royalties during the year. There is no penalty for issuing a 1099 unnecessarily, but there are penalties for failing to issuing a required 1099. In addition to issuing 1099s, a business must also send Form 1096 to the IRS summarizing the information on all 1099s.
The primary use of 1099s for businesses is to report payment to independent contractors. For example, if your business hires a self-employed painter to paint the office, this person works on a contract basis and is not an employee. At the end of the tax year, you will need to issue a 1099 to the IRS reporting the payment made to the contractor. You are also required to send a copy of the 1099 to the contractor.
1099s are used to report payments to non-employees. When you pay an employee, you will not report the payments on a 1099 but rather on a W-2. You do not issue 1099s to corporations, unless the corporation is owned by an attorney, health-care provider or fish seller. The IRS rules only require you to send 1099s to proprietorships, partnerships and limited liability corporations. If you make payments via a credit card, you do not need to report the payments, as the credit card companies report these transactions to the IRS.
As with most tax issues, determining when to issue a 1099 and in what amount can be a difficult task. While tax software can help you create the 1099s to issue, using the services of an accountant or other tax professional can reduce the chances of making a mistake with the preparation of your 1099s. Even if you use tax software to prepare your 1099s, you may want to use an accountant or other tax professional to look over the 1099s and your other tax forms for accuracy.
- IRS.gov: Instructions for Completing Form 1099-MISC -- Main Contents
- Travel Weekly: IRS Rules About Sending 1099 Forms Are Arbitrary but Clear
- U.S. Small Business Administration: Reporting Independent Contractors Compensation: A Guide to the IRS 1099 Form
- NOLO: How to Hire a Tax Professional for Your Small Business
- Inc: Tax Returns