Small Business Guide for Preparing IRS Form 1099-Misc

WHAT? The IRS requires businesses to issue Form 1099-Misc to contractors (including LLCs and Partnerships) paid more than $600 in business-related payments during a calendar year.  The IRS exempts payments to Corporations and payments made for certain items such as telephone, freight, storage or related items. Payments made to a business for the purchase of merchandise is also exempt from reporting.  

WHY? Independent Contractors are typically compensated on a per project basis and the employer does not withhold payroll taxes on behalf of the contractor.  Form 1099-Misc serves the same purpose as a W-2 for an employee.  This form reports all of the income earned by an independent contractor which must be reported on the contractor's tax return.  The contractor is responsible for paying taxes on income earned. If you need help determining the appropriate classification of an employee or independent contractor - refer here.

HOW? Employers should obtain a completed Form W-9 for each contractor prior to conducting business.  This form includes information necessary to complete Form 1099-MISC such as their name, address and Social Security number (SSN) or employer identification number (EIN).  If the contractor has not provided a W-9 or omitted specific information, the IRS requires the employer to withhold 28% of the contractor’s pay and send this directly to the IRS (backup withholding).  

Businesses cannot use a downloaded Form 1099-MISC or a sample from the IRS.  Businesses are required to use specific forms that are readable by the IRS scanner that process all 1099s. You can order these forms from the IRS by calling 1-800-TAX-FORM (1-800-829-3676) or going on their website. There are also alternative sources for getting these forms; you can order them from some office-supply stores, or you can use financial software like QuickBooks to create, distribute and file the proper 1099s.

Each 1099 should include the amount of money paid to the contractor, which is entered in Box 7 under the title “Non-employee compensation.” If you withheld any pay from the contractor (e.g. if you had to provide the aforementioned “backup withholding”), you will also need to fill in Box 4 or 11 in relation to any federal or state income tax you withheld.

WHEN? Beginning with 2016 form, both the employee and agency copies of Form 1099-Misc may be due January 31.  If you're filing Form 1099-Misc and reporting amounts in Box 7: Nonemployee Compensation, then you will need to meet the new filing deadline of January 31. If you don't have amounts in Box 7, then the deadline remains February 28 for paper filings or March 31 for electronic filings.

Please contact me if you'd like my assistance in preparing your 1099-Misc to meet the new January 31st deadline.  Although this new deadline is two months away, businesses should begin reviewing their records for contractors requiring a 1099-Misc and  ensure W-9's have been obtained to ensure forms are completed accurately and timely.