IRS 101: Common Questions About 1099 Forms For Small Businesses
Running your own business can be incredibly rewarding—from building an enterprise that resonates with your core values to doing what you love every day. But business ownership comes with its own set of hassles, too, not the least of which is a more complicated tax process.
If you are a small business owner, you should think about hiring an accountant to prepare your taxes. Not only will a professional save you time and headaches, but they can help you grow your business by planning for the long-term and assessing financial risks. Even so, it’s important for every business owner to have a basic understanding of the tax process and filing tax returns.
Let’s take a look at the one tax form most small businesses and independent contractors deal with on a regular basis: the 1099-MISC (also commonly referred to as “form 1099”).
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What is the 1099 form (1099-MISC form) anyway?
When you work for a corporation or state agency, their payroll office tracks employee hours, subtracts social security and Medicaid payments, reports income to the IRS, and cuts the check you receive each payday. The yearly summary of this information is known as a W-2 form.
The 1099-MISC form lets the US Internal Revenue Service (IRS) know what payments have been made to people operating as independent contractors or unincorporated businesses (such as self employed individuals). You can think of the 1099 form as the equivalent of a W-2 form for independent workers; both forms are information returns. Whether you hire people to perform services that help your business run smoothly, or you receive payment for services as an independent contractor, 1099-MISC is the form you’ll need.
When do I have to report 1099 income in the tax return?
There is a $600 threshold below which the payer doesn’t have to complete a 1099-MISC reporting form. Say you hire a service to keep your business property neatly mowed and landscaped, and they charge $50 each time. If you use them 10 times, you don’t need to report the payments you made. But if you add in a spring cleanup, your payments may exceed the $600 threshold, at which point you’ll have to report the income for that tax year. As this example implies, $600 is the cumulative figure for a given tax year.
Note: The $600 threshold is for the payer only. Independent contractors who earn less than $600 from a single client or agency still have to pay applicable state and federal taxes on that income even though they may not receive a 1099-MISC form.
Now I’m confused. Do I have to complete a 1099-MISC reporting form on personal services of more than $600 as well?
The 1099-MISC goes out when a business pays someone who isn’t on their payroll. It does not apply to personal service expenses. Say you are a freelance writer and you hire someone to paint your home office. If the charge is more than $600, you need to issue a 1099-MISC form in order to deduct the expense from your taxes. However, if the same independent contractor also paints your bedroom, you don’t need to report the money you paid him to perform that service.
Is there a reporting deadline?
The IRS requires you to report 1099 income to both the independent contractor and the IRS itself:
- January 31: the deadline to send 1099 reporting information to independent contractors whom you paid more than $600.
- March 2 (paper filing) or March 31 (e-filing): the deadline to send 1099 reporting information to the IRS.
You may also need to report information to the state by a certain deadline, depending on where you live.
Note: The actual dates may vary from year to year. For instance, the reporting deadline for the 2014 tax year was February 2nd because January 31st fell on a weekend.
How do I issue a 1099-MISC report?
You have a couple of options:
- Do it yourself. You are free to fill out the necessary paperwork and mail it by the appropriate deadlines to the independent contractors and the IRS. Most online tax preparation services, like QuickBooks and TurboTax, have software that can help make the process easier.
- Hire a CPA or tax preparer. If you are already using an accountant to file your state and federal income taxes, it makes sense to use the same person to issue your 1099-MISC forms and report them to the IRS.
What if I don’t receive a 1099-MISC form even though I earned more than $600 in services from a business?
If the company used Paypal or another electronic service to issue payments, they are not required to issue a 1099-MISC. But remember, you are still responsible for the taxes even if you did not receive a form.
What if there’s a mistake on the 1099-MISC form I either issue or receive?
If the mistake is on a form you issue, you will have to amend and re-issue the 1099-MISC to both the individual and the IRS.
If the mistake is on a 1099-MISC form that you receive, you need to notify the IRS and the business that issued the form. If you receive a 1099 for services you never provided, however, fraud or identity theft could be at work. Because failing to report 1099 income on your 1040 form is an excellent way to trigger an audit, you should be vigilant about making sure both parties know the form was sent in error.
As you can see, 1099-MISC forms are the standard reporting document for most financial exchanges in the small business world. Keeping careful track of payments and services (not to mention managing your invoices properly, even if with a simple invoice tool) and knowing when the reporting deadlines are may not guarantee a stress-free tax season, but they will certainly make the process go more smoothly!
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