Business owners can get stressed out in January with all the year-end work that needs to be completed – and oh the deadlines. Processing 1099’s is one of those year-end tasks that can be confusing and frustrating. The key is to start the process early. We like to start the process in early November which gives us 3 months to complete the project. Let’s dispel the confusion. Here’s some information about who and when.
General Rule: If you pay someone more than $600 in a calendar year for services, not material/product, then you are required to provide a 1099 showing the amount you paid. One tip is to collect a W-9 at the time of payment so you know if the business is a sole proprietorship, LLC or Corporation. If it is a corporation, then no 1099 is required. The 1099 is due January 31st. The 1096 form is not required if you E-File. If you file by paper then it is required.
Corporations do NOT get 1099s, but some people are confused if they should send a 1099 to LLCs. Send a 1099 to single-member LLCs and multi-member LLCs (partnerships.)
1099s are required to ALL attorneys regardless of their entity type or amount paid! Fill in box 10.
If you are leasing office space, you are required to send a 1099 and fill in Box 1.
If you have are paying interest on a loan, you are required to fill out a 1099 INT box 1.
Addressing the 1099: If the person you paid uses their Social Security number as a tax ID number, then the person’s full name must be on the first line of the 1099.
Reimbursed Expenses: If you pay a subcontractor for expenses incurred, do NOT include that amount in box 7.
Strict Classification Rules: If you hire a subcontractor, be sure that the state won’t deem the person as an employee. A few indications to strengthen your case are:
You have a contract agreement between parties.
The subcontractor invoices the business.
The subcontractor has a business license. The business does not tell the contractor WHEN to perform the work or HOW to do their job. The subcontractor uses their own equipment and materials.
The subcontractor is available to be hired by other companies. For California, Governor Brown signed a bill that starting 01-01-12 if any employer is found to willfully misclassify a worker as an independent contractor, they penalties will increase to $10,000-$25,000 per violation.
Penalties: If you miss the deadline and file within 30 days, the penalty is $50. If you file after 30 days of the missed deadline, the penalty is $100. If you file after August 1, or do not deliver, or have an incorrect name/TIN Combo the penalty is $260. Intentional Disregard results in a penalty of $530.
1099-K Rules: There has been a lot of confusion regarding the new 1099-K rules. All merchant companies that process credit card payments are required to issue 1099-Ks to the seller. It can be for 1 transaction for any amount. The main reason for this law is to capture payments going through eBay, PayPal and Amazon. However, now the common business owner will get a 1099-K as well if their clients/customers pay them with a credit card. Here is the confusing part: businesses will provide a 1099-MISC for payments made with a check/cash and the merchant company will process 1099-K’s made with a credit card. Let’s give some examples to clarify:
Example 1 – You pay a subcontractor $700 with a check and $800 with a credit card. You will issue them a 1099-MISC for $700 and the subcontractor’s merchant company will give them a 1099-K for the $800.
Example 2 – You pay a subcontractor $300 with a check and $800 with a credit card. We recommend that you still issue a 1099-MISC for $300 because the combine total payment to the subcontractor (check and credit card) was over the $600 amount – this is the safe answer.
If the 1099 comes back to you undelivered, keep a copy for your records to show the attempt.
If the contractor has already performed their services and you cannot get the contractor to fill out the W-9, keep a log of the attempts to contact them by phone, email or letter. The IRS has penalties for not sending the 1099 and if you show intent, hopefully there will be grace in the penalties.
Hope that dispels the confusion of this year-end activity. Need help or just don’t want to process your own, Sooter Consulting can help. Give us a call.