Ok I get it, 1099’s are boring. I know. But I am writing this post on January 20th, roughly 10 days before the 1099 due date and, as you can imagine, my inbox is flooded with boring questions on this boring topic. I put together this post to help guide small business owners as to what they should be doing now and throughout the year to make this boring annual task of 1099 reporting as seamless as possible for everyone. While this won’t cover every scenario you will come across, it should cover 90% or more.
Why do I have to care about 1099’s?
Very simply you have to care about 1099’s because the IRS requires you to care. There is a requirement in the tax code that you as a small business owner must file these things by January 31st for payments made in the prior calendar year. There is even a question on your business tax return asking whether or not you should have filed these forms, so in effect you would be committing perjury by signing your tax return if you answer this question incorrectly.
Ok, I have to deal with this, so who exactly do I need to send 1099’s to?
Generally speaking, you must send a 1099 to any person or entity that has performed a service for your company and you paid them over $600 during that particular year. Remember, this is for service, and not applicable to the sale of tangible personal property. Other than the obvious subcontractors or freelancers who we all know must receive a 1099, other service providers such as law firms, accounting firms, construction or maintenance contractors, IT professionals, and web designers are also examples of service providers that you must send 1099’s to that are often overlooked. There are of course a few exceptions to the general rule:
- If the entity you are paying is incorporated you do not need to send a 1099. When I say incorporated that means the company has the letters Inc. at the end of its name, not LLC. If the company is an LLC, most of the time you will be required to file a 1099. Without getting into the details, LLC’s have the option to choose how they are taxed, if the W9 they send you indicates they are taxed as a corporation or S corporation you will not need to send a 1099.
- If you paid you service providers through credit card or other similar payment processor such as PayPal you do not need to send 1099’s. These payment processors are already required to send 1099-K’s, in this case so you are off the hook.
Ok, I now know who I need to send these 1099’s to, what information do I need to prepare them?
The information is fairly basic. All you will need is the full name of the person or entity, address, tax ID# and the dollar amount you paid them throughout the year. That’s it. You should be able to easily get the dollar amount you have paid though your accounting software. The personal information of your subcontractor will need to be provided to you via a signed form W9 (https://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=103). Best practice is to collect these forms W9 prior to paying your subcontractors, this way you are not scrambling in January to collect this data. Oh and for some reason holding pay until the W9 is provided to you seems to be a pretty effective way to collect them pretty quickly.
What if my subcontractors are non-US citizens or non-US entities and do not have a SSC or tax ID#?
If the non-US citizen or entity is performing services for your company while they reside outside of the United States you will need them to fill out and provide to you a form W8BEN (for humans) https://www.irs.gov/pub/irs-pdf/fw8ben.pdf or a W8BEN-E (for non US entities) https://www.irs.gov/pub/irs-pdf/fw8bene.pdf . This form essentially certifies that, 1. yes they are foreign and 2. they are performing the service from outside the USA. This is very important because if the non-US person or entity were performing the service for you while inside the USA, you, the US taxpayer, would be required to withhold 30% of their pay and remit it to the IRS. As you must have guessed, in the event of an audit, the IRS will kindly ask for these forms from you to prove your non-US contractors worked from outside of the USA. If you cannot produce these forms, you can count on the IRS asking YOU for the 30%, not them.
I have collected my W8BEN’s, what do I do with them?
That’s it, best practice is to have them updated annually by your vendors and after that all you have to do is keep them on file in case of an audit. They do not actually get filed anywhere.
Anything else I should know?
Other than subcontractors, other common 1099 filings for small businesses are for rent and interest paid. You should be applying the same process for your landlord or any private lender you may have borrowed from.