With the rise of the “gig economy” and so many people now working as independent contractors (ICs), as opposed to full-time employees, you should be well-familiar with the rules and requirements for the tax form known as a 1099.
A 1099 is designed to document and track payments you make to ICs for services they provide your company. Additionally, 1099s help ICs accurately report their income when they file their taxes, as well as provide a mechanism for the IRS to ensure IC income is properly reported.
The full spectrum of rules and procedures governing 1099s can change with time, but the fundamentals have stayed fairly consistent, even in the wake of Trump’s tax overhaul. If you hire ICs to perform services for your business, you should be aware of these basic guidelines—and reach out to us and/or your CPA if you have more specific questions.
Who is required to file a 1099?
If you pay an IC for a service provided to your company, you’ll likely need to report that payment to the IRS using a 1099 and also provide a copy to the IC. There are actually several different types of 1099 forms, each of which can apply to specific situations, but the most common one (and what’s covered here) is Form 1099-MISC.
As a general rule, you must file a 1099-MISC for each individual or entity you pay for services provided to your company. You don’t need to file a 1099 for personal services, only for those services performed for your business. Note, 1099s are only required when paying for services, not goods or equipment.
If you paid your IC through PayPal, you do not need to file a 1099; PayPal handles that on their end. And if you paid your IC through their corporate business entity, you also do not need to issue a 1099.
What qualifies as a service?
Payments that can require a 1099 include not only those made for normal business services, such as creating your company website, but also for things like rent, royalties, broker payments, and legal fees.
Is there a minimum payment amount?
For most transactions, you’re only required to report payments of $600 or more in a single calendar year. You aren’t usually required to file a 1099 for payments under $600.
That said, you’re not prohibited from filing a 1099 if this threshold isn't met. Moreover, the IC is not excused from reporting that income, regardless of whether you file or the threshold is exceeded.
What individuals and entities qualify?
In most cases, a 1099 is issued to everyone but corporations (S corps and C corps). This includes individuals, partnerships, and most business entities. For example, a 1099 is required for limited liability companies (LLCs) that are taxed as individuals, but not for those taxed as corporations.
However, there are several special circumstances where payments to corporations are reportable and a 1099 is required. These exceptions are listed in the Form 1099-MISC instructions, but consult with us or your CPA for more details.
What information do you need to include?
To file a 1099, you’ll need several pieces of information about your IC, such a taxpayer ID and business address. All of this information can be collected using a W-9 form. Given this, you should make it a standard practice to request a completed W-9 from any IC you expect to pay at least $600 in a year before you pay them.
What are the deadlines for 1099s?
The IRS requires you to send out 1099 forms to your ICs by January 31st. Then, you also have to send in the transmittal Form 1096 to the IRS before February 28. If you neglect to file 1099s at all, or file too late, you can face serious fines.
Depending on how late you file, for instance, penalties can range from $50 to $270 per form, with a maximum of $1.5 million for the year. If you intentionally disregard sending a correct 1099, you can be subject to a minimum penalty of $250 per statement, with no maximum. If you’re late sending your 1099s for this year, contact us so we can help you fix that now and get a system in place for the future, so it doesn’t happen again.
We can help
While hiring ICs can provide your business with significant advantages, you need to pay close attention to the rules governing 1099s to avoid penalties and other complications. Indeed, there are several additional considerations regarding correctly classifying ICs and properly drafting IC agreements that are equally, if not more, critical.
For trusted guidance on hiring, classifying, and paying ICs, consult with us. We can help you maximize the benefits—and minimize the liabilities—that can come from employing ICs to help operate your business.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.