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Here at FA Bean Counters, we receive a lot of questions from small business owners about 1099s. A LOT.
And we’re happy to answer those questions, because guessing at the answers is a dangerous game. Penalties for filing incorrectly (or not filing at all) can add up quickly.
To make your life easier, we’ve answered some of the most common 1099 questions.
What is a 1099?
It’s always nice to start with an easy question. While a lot of mystery seems to surround the topic, Form 1099 is nothing more than an IRS tax document used to report miscellaneous payments made to non-employee individuals for services provided to your business.
Who receives a 1099?
This is where things start to get more complicated. It seems like everyone has a side hustle these days.
Do you know what all those side hustlers get? 1099s.
(We wrote an entire blog post on how to determine who receives a 1099.)
Any non-employee who does $600 or more worth of work for your company will need to receive a 1099.
Have a non-employee who cleans your office space? They need a 1099. What about a non-employee who markets your business? They need a 1099. A virtual assistant who is not an employee? You guessed it—they also need a 1099.
Are you noticing a common denominator here? “Non-employee” is your key to figuring out who needs a 1099. Which brings us to our next question…
What is "non-employee compensation"?
It’s best we go straight to the source here: the IRS.
Per the IRS, if the following four conditions are met, you must generally report a payment as non-employee compensation:
- You made the payment to someone who is not your employee
- You made the payment for services in the course of your trade or business (including government agencies and non-profit organizations.
- You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
- You made payments to the employee of at least $600 during the course of the year
Do I need to issue a 1099-MISC for payments made for personal purposes?
Nope. You are only required to issue 1099-MISC forms for payments you made in the course of your trade or business. Personal purposes don’t count.
Are there exceptions to the 1099-MISC requirement?
Obviously. This is tax law we’re talking about.
Vendors—including LLCs and partnerships—that operate as S- or C-corps do not need to be issued 1099s.
But there’s an exception to this exemption (you probably saw that coming). If you paid for legal services, you are required to send a 1099 regardless of how an entity is structured. (You can determine/verify business structure from the business’s W-9.)
The following actions similarly do not necessitate a 1099:
- Payments for merchandise, telegrams, telephone, freight, storage and similar items.
- Payments made via credit card or PayPal. The credit card processor will send a 1099K to the individual or company at the end of the year…
- …which means if you paid for legal services via credit card or PayPal, you don't need to send a 1099.
How can I make the 1099 process easier at year end?
You can’t. You have to suffer through it.
We’re kidding. There are a few things you can do to make your life easier:
- Collect W-9s up front from any vendor you expect to pay more than $600. How can you encourage vendors to provide their W-9s in a timely manner? Tell them you’ll pay them once it’s received. That typically does the trick.
- When doing monthly bookkeeping, make sure to record the vendor name in the payee line.
- Pay for things on a credit card if possible.
Are there deadlines? There must be deadlines. Tell me more about these deadlines.
- The filing date is January 31 for 1099-MISc with amount in box 7.
- The filing date is February 28 for other Forms 1099 & 1096.
(Check with your state to see if you have to file copies of the 1099s with them.)
Do 1099s exist just to make the lives of small business owners more difficult?
Believe it or not, they don’t. 1099s have a much less sinister history. They were designed to increase tax compliance.
Just as W-2s help the IRS track employee wages and salaries as a means of minimizing tax evasion, 1099 forms similarly alert the IRS to other forms of income.
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