January 31 is the deadline for filing all your 1099 forms with the IRS. Will you be ready?
Since business owners who don't get these documents to the IRS by the deadline can face penalties, it's wise to review any questions you may have about the process, one of the most important of which may be: "Who do I send a 1099 to?"
Gail Rosen, CPA, a shareholder with Wilkin & Guttenplan P.C. and a small business tax specialist, covers what you need to know to prepare for the upcoming deadline.
What Are 1099s For?
If you own a business, the IRS wants to know whenever you pay someone. If you're paying contractors and other nonemployee hires, you report this information on Form 1099. The form will list how much you paid someone over the year, along with some basic information like the subcontractor's name, address and tax identification number.
Before you pay a contractor, have them fill out a W-9 form, which requests all the information you need for the 1099. This way, the IRS can figure out how much the subcontractor should owe in taxes. "Sending out 1099s is not optional," as Rosen says. "It's the law."
Who Do I Send a 1099 To?
1099s need to be sent to the IRS. People you pay only need to see the W-9. You must compile a 1099 when you pay someone for performing services for your business, but not for personal services. "If someone mows your lawn at home, they don't get a 1099. They're only for business payments."
And only send out a 1099 if you pay someone more than $600 for the year. If you aren't sure if you'll pay someone that much throughout the year, Rosen still recommends asking them to fill out a W-9. It's better to be safe than sorry with your business taxes.
Another consideration for whether you need a 1099 is how the person you're paying does business. If they're working as a sole proprietorship, partnership or limited liability company, you need to send them a 1099. If they're operating as a corporation, however, you don't. Rosen points out one exception: "If you hire an attorney for your business and pay them more than $600, you always need to send them a 1099, even if they're incorporated."
1099 Submission Best Practices
The IRS takes these deadlines seriously and has steep penalties for failing to submit 1099s — between $50 to $260 per late return. The later they are, the more expensive it gets. If the IRS rules that you intentionally disregarded sending out 1099s, they can charge you $530 per missed return. Make your life easy and get these in on time.
Filing your 1099s is easier if you prepare throughout the year. Any time you hire someone, have them fill out a W-9 form right away. "Ask people to fill out a W-9 before you send them their first check," Rosen suggests. "They'll be a lot more motivated than if you're just waiting for them at tax season." Rosen notes that if you have more than 250 such forms to send out, you must submit them electronically to the IRS. They can't be sent in by mail.
Finally, Rosen reminds business owners that they may need to send 1099s to their state governments, too, and that those deadlines may differ from the IRS's. These forms will likely include the same information, and many states simply accept the IRS form. But check with your state's department of revenue for its particular requirements.
As usual, it's better to be safe than sorry. If you're still unsure about sending in 1099s, don't hesitate to contact a tax professional who can answer all your questions and walk you through the process.
This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice. You should consult with your own legal counsel, human resource, accounting or other professional advisor for circumstances pertaining to your business.