As a U.S. business owner, if you hire independent contractors and service providers, you probably will have to issue a special tax form to them, called the 1099.
Keep in mind that there are several variations of the 1099 form. For example, there’s the 1099-INT for interest income that you may receive from your bank. For today’s purposes, we’ll limit this article to the 1099-MISC form. That’s the form that small businesses use to report miscellaneous income paid to others during the year.
Let’s go through some commonly-asked questions and answers (we’ve updated this information for 2015):
What type of income do I report on a 1099 form?
The 1099-MISC should be used for reporting payments to independent workers — not payments to employees. For employees, you use form W-2 instead to report employment income you paid them.
Independent workers are typically self-employed individuals or small service firms that you hire as independent contractors. Examples of independent workers might include a graphics designer, Web developer, cleaning service, freelance writer, landscaping or grass cutting service, forum moderator or other self-employed provider. The key is that the independent worker is self employed — and not your employee.
You also use the 1099-MISC for reporting payments made to unincorporated business service providers, attorneys and partnerships.
What is the $600 threshold?
You are required to complete a 1099-MISC reporting form for an independent worker or unincorporated business if you paid that independent worker or business $600 or more. You add up all payments made to a payee during the year, and if the amount is $600 or more for the year, you must issue a 1099 for that payee.
If the amount you paid the worker totals less than $600 for the tax year, then you are not required to issue a 1099 form.
Note: there are special threshold rules for reporting certain other types of payments, such as payments made to attorneys, fishing boat proceeds, and sales of consumer goods for resale. You’ll need to consult the IRS 1099-MISC form instructions for details on reporting those types of payments. For purposes of this article, we are speaking only of payments to independent workers or unincorporated business service providers.
When does the 1099-MISC form have to be issued?
There are two important dates to remember. One is the date for mailing the 1099 form to the worker. The other is the date for reporting to the IRS.
A. Mailing form 1099 to the worker
February 2, 2015 is the deadline for furnishing the 1099-MISC forms to independent contractors and service providers you paid money to during 2014. Mail a copy of the 1099 form to the independent worker or service provider by that date.
Normally the date is January 31 of each year. However, because the 31st falls on a weekend, the date is extended to the next following business day — in this case, February 2nd.
Tip: mark that deadline on your calendar right now. That way you are less likely to forget and have to scramble at the last minute.
Another tip: It’s a good idea to check in advance with each payee to make sure you have the payee’s current address. This will save you extra work. Why? Because the payee will contact you if he or she does not receive the 1099 in the event it’s not forwarded, and you’ll just have to issue a copy all over again. The Post Office is not as fast or reliable when it comes to forwarding mail, as it used to be.
Can you send 1099s via email? All the tax pros we talked with refused to be pinned down on whether email is sufficient for recipients. Note that the IRS uses the word “furnish” rather than “mail.” However, the IRS does not define what “furnish” means.
B. Reporting 1099s to the IRS
March 2, 2015 is the deadline to file the 1099 information with the IRS, if you file by paper. That date is extended to March 31, 2015 if you do electronic filing of 1099s.
Depending on state law, you may also have to file the 1099-MISC with the state. Greatland has an excellent chart showing various state law deadlines.
(Note: there are different dates for certain other categories of payments such as payments to attorneys. Please consult the Form 1099-MISC instructions for dates for other situations.)
See the example image below for how to complete the 1099 MISC form.
Non-U.S. workers: Do I need to issue a 1099 to a foreign worker?
If you hire a non-U.S. citizen who works remotely via the Internet from another country, generally speaking you do not need to file a 1099 for that person.
For example, let’s say you hire a freelance writer who is a Brazilian citizen. The freelance writer performs all services (i.e., writes the articles) outside the U.S. from the writer’s home in Brazil, and earns $900 for the year. In that case, you probably don’t need to issue a 1099 to that foreign worker.
However, if the foreign worker performs any work inside the United States, you would need to file the 1099.
It is your responsibility to verify that the worker (1) is indeed a non-U.S. citizen, and (2) performed all work outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN.
Corporations: Do I need to issue 1099 forms for payments made to corporations?
No, in general you do not need to issue 1099 forms for payments you made to a corporation. For instance, if you pay a corporation that, say, provides Web design services or some other business service, you do not need to issue a 1099.
Keep in mind that an LLC or limited liability company is not the same as a corporation. In general, you are expected to send 1099-MISC forms to most small-business LLCs.
(How can you tell the difference? An LLC usually has the letters LLC or Ltd. at the end of the company name. A corporation name typically ends in Inc. or Corp. However, the payee should indicate the type of entity it is when it fills out and gives you a W-9 form in advance — that’s the best way to tell.)
Note, there are a few limited exceptions to the corporation rule. For example, if the payment is to a corporation for legal services, you must report those on the 1099. The IRS’s 1099 instructions outline the exceptions.
PayPal and credit card payments: What if I paid my independent workers or service providers electronically?
If you paid unincorporated businesses or independent workers electronically, such as through PayPal or a credit card, then you are not required to issue a 1099-MISC to that payee.
Instead, the reporting responsibility lies with the electronic service, which may issue a 1099-K. However, some small businesses elect to send the 1099-MISC forms anyway, in an abundance of caution.
See more in our discussion: 1099-K versus 1099-MISC for electronic payments.
Personal payments: Do I need to issue 1099s for payments made for personal purposes?
No. You are required to issue 1099-MISC reports only for payments you made in the course of your trade or business. (If you run a non-profit organization, that’s considered a business for purposes of 1099s.)
Let’s say that you pay a landscaper who is a sole proprietor to do grass cutting and mulching at your home, and it has nothing to do with your business. You don’t have to issue a 1099 to the landscaper, because it was a personal payment.
How do I issue 1099-MISC forms and where do I file them?
As the payer, you complete the form and send a copy to the recipient. You file the form with the IRS, and you may also have to file with state tax authorities.
There are a number of ways to do this:
- File everything on your own. You can complete the paperwork on your own, and mail it to workers and IRS. Various software programs can help with parts of the process, including QuickBooks, Sage, Xero and TurboTax.
- Use a 1099-MISC filing service. If the thought of navigating all the forms on your own is too complex for you, consider paying for a filing service. For instance, Intuit has a 1099 filing service you can use. Greatland also offers a 1099 filing service.
- Have your CPA or tax preparer handle the 1099 forms for you. They will fill out the 1099s for you to mail to workers. They also do the filings with the IRS and state taxing authorities on your behalf. For those who use a CPA or tax preparer, this is probably your best option. At Small Business Trends, this is the option we use.
What if there’s an error in a 1099 form?
A payer who later discovers an error should re-issue a corrected 1099 form to that payee, and correct the filing with the IRS.
And if you are a payee, be sure to review every 1099 you receive against your own records. This is for a couple of reasons:
- The payer may have made a mistake, such as the wrong amount. If so, contact the payer and ask to have the 1099-MISC form corrected and reissued.
- Your company could be a victim of identity fraud. One year here at Small Business Trends, we received a 1099 form for affiliate income we supposedly earned from the eBay Partners Network. However, we’ve never been a member of that network and received zero income from it. Someone perpetrated a fraud against eBay by using our name and address as the payee (luckily they didn’t know our correct TIN). We sent a certified letter to eBay, and also attached an explanation to our tax return.
In the event of an error, the IRS instructions to recipients say, “If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.”
Is there a penalty for NOT issuing a 1099 MISC form?
Yes. For this purpose, we went to the Turbo Tax website. It has a concise statement about penalties, noting that the penalty “varies from $30 to $100 per form ($500,000 maximum per year), depending on how long past the deadline the company issues the form. If a company intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.”
In fact, the IRS requires you to affirmatively state under penalty of law, whether you have met the 1099 filing requirement. Most small businesses complete a Schedule C as part their own tax returns. Schedule C requires you as the payer to check the boxes on Lines I and J, stating:
- Whether you made “any payments in 2014 that would require you to file Form(s) 1099”; and
- If you checked the box for Yes, then “did you or will you file the required Forms 1099”?
Tip: don’t ignore 1099 filings. Get on it – now!
What if I received miscellaneous income during the year and the payer never sends me a 1099 form?
If you performed work as an independent contractor and you earned at least $600 from a payer, that payer is required to send you a 1099-MISC form. But if you received less than $600 from that payer — say you received $350 — don’t expect to receive a 1099 form.
Another exception: if you received payments via electronic means such as a credit card or PayPal, the payer is not required to send you a 1099-MISC.
However, let’s say you earned more than $600 for the year. You received the payments via check, and not electronically. Still, the payer fails to send out 1099 forms. Or let’s say you moved and forgot to tell the payer, and so you don’t receive the 1099. In such situations, contact the payer and ask them to quickly mail the form or a duplicate copy out to you.
And remember, you are not excused from reporting your income, just because you never received a 1099 form (or because your income falls under the $600 threshold). Don’t rely on receiving 1099s for tracking and reporting your income.
Always track income independently, and reconcile your bank records. And report all income.
If I am an author, what is the amount for a 1099 for book royalties?
There is a special dollar threshold for book royalties: $10.
Authors should not be surprised if they receive 1099s for very small amounts — well under $600.
Example: let’s say you published a book on Amazon Kindle, and sold a handful of books during the year. In that case, you may receive a 1099 from Amazon for amounts such as $12 or $25 or other small amounts.
Where can I get the 1099-MISC forms?
The IRS’s 1099-MISC information center is here.
Order tax forms from the IRS here. Or, another intriguing place is FormSwift, which offers an online fill-in-the-blank 1099 MISC.
The IRS’s free electronic filing system for 1099s is here.
Final Pointers: always consult your tax advisor and IRS 1099 instructions!
Disclaimer: The information in this article is for general educational purposes, not tax advice. While we strive to be accurate, we can speak in generalities only here. The tax code has just gotten too complex to cover this topic in 2,000 words.
There are many many exceptions to the rules, and individual facts can make a difference. Always read the IRS instructions for the 1099 form carefully. And consult your own tax advisor for advice specific to your situation.