Does your business use outside help? Do you hire independent contractors or other service providers to help you with certain tasks? If so, you probably need to know about the IRS Form 1099-Misc.
What is the 1099 Form?
The 1099 form is a tax form which a business fills out and supplies to the IRS and its independent service providers to record payments made by the business to the service provider for tax purposes within the taxable year.
The 1099 is an "Information Filing Form" to report non-salary income for income tax purposes. There are over a dozen 1099 forms, but the most popular is the 1099-MISC.
A business is required to file a 1099-MISC if you paid an independent service provider over $600 in a tax year. Payments under $600 do not need to be reported by the business to the IRS, however, the service provider is still required to report all income on their tax returns.
Many companies, especially eCommerce and retail businesses, tend to outsource a lot of their work to third parties, and if you work with even 1 service provider who is paid over $600, you must file the 1099 form for them. It is the company's responsibility to fill out the 1099 form and supply it to the IRS and service provider. The IRS uses the information provided by the paying company on the 1099 form to verify the recipients income for federal income tax purposes.
Who is an Independent Service Provider for 1099 Purposes?
The list who qualifies as an independent contractor or service provider is very broad, and it is important to be aware of all the parties who are required to receive a 1099 form. An independent service provider is anyone hired on a contract basis to complete work on a project or assignment. It does not cover employees of the company, as they receive pay stubs and W2 form at the end of the year.
It is important to be aware of the difference between independent contractor and employee, as misclassifying employees as contractors can have serious penalties. Common examples of independent service providers are fulfilment centers, warehouse providers, marketing agencies, accountants, lawyers, copywriters, content writers, web developers, SEO experts and bookkeepers.
You would also issue a 1099 to a real estate agent or other non-employed party paid a commission for services rendered, and if you rent your office, you would issue a 1099 form to your landlord for the rent paid.
All independent contractors and partnerships who perform a service for your company must receive a 1099 for the work they do. You do not need to file a 1099 to a corporation, or to an LLC which has elected to be taxed as an S or C Corporation.
The exception to this rule is that you still send a 1099 to a law firm for legal fees paid or settlement proceeds paid to a law firm, even if the law firm is incorporated, and you send a 1099 to for profit medical providers. It is important to note that the 1099 form is exclusively for "service providers", and you do not provide a 1099 to suppliers of materials and inventory.
The IRS website has a full list of who is required to receive a 1099-Misc Form.
What Are the Filing Deadlines?
There are 2 1099-MISC forms, Copy A which is sent to IRS and Copy B which is sent to the contractor. Copy A must be sent by Jan 31, however extended to Feb 28 if you are not reporting payments in box 7 of the form. Copy B must be sent to contractor by Jan 31, but extended to Feb 15 if you are reporting payments in box 8 or 14 of the form.
To make sure you are never running behind, it is a good practice to always get information from your service providers at the time the service is being performed, so you are not chasing after them for it later at tax time. You should have every service provider fill out a W-9 Form in which they will provide you with all of the necessary information to properly fill out the 1099 form. The information you need to gather from your independent contractors is:
- Their legal name
- Their official corporate address
- Taxpayer identification. (This can be a social security number (SSN) or individual taxpayer identification number (ITIN) for an individual sole proprietor or an employer identification number (EIN) for a partnership or LLC.)
To fill out the form, you will also need to know the amount you paid them during the tax year, but this is information you should have in your own accounting records. It is important to always keep the books up to date and ensure you have a good accounting software (
What Happens if You Miss the Filing Deadline?
Missing a filing deadline can be costly, especially if you have many independent service providers and you miss the deadline on them all, as the penalties are assessed per statement which is not timely filed. Failing to timely file your 1099 forms can incur the following penalties:
- $50 per statement if you file within 30 days of the deadline
- $100 more than 30 days but before Aug 1
- $260 on or after August 1
- If you intentionally fail to file your 1099 forms with the IRS, you can be assessed a minimum fine of $530 per statement with no maximum penalty.
If you can't file the 1099 form with the IRS on time for any reason, you should request an extension of time to file with IRS Form 8809. Filing the extension request will only extend your time to file the 1099 with the IRS. It does not extend the deadline to send Copy B of the 1099-MISC to your service provider.
Always Stay On Top of Your Tax Filings
It is important to always stay on top of your accounting records and tax filings, as failure to do so can have serious consequences, and cause any business to fail. Finaloop closely tracks all of your payments to vendors for you, identifies the type of payments, and can help to send you reminders to send and receive W-9 forms from all of your service providers. Finaloop will gather the information provided and prepare your 1099 filings so all you have to do is send it in, ensuring you never miss a deadline or pay any penalties.