1099 Reporting: Understanding the Basics

If you are a small business owner who clicked on this article and have no idea what a 1099 is or have not started gathering information to file 1099’s, pay attention closely.  If you have a business and paid someone or a company more than $600 throughout the year, generally stating, the IRS requires you to file a 1099 for that individual or company or you could face fees and potential loss of a deduction.

Now, with that being said, gathering the necessary information and getting 1099’s out the door does not have to be that difficult.  You still have time; I would just get started as soon as possible.  To help you along the way, I want to outline some information that will help you decide if a 1099 is required for your specific payee(s), and if so, the process to file them.

Who Do I Need to Send a 1099-MISC To?

Any individual, company, contractor, vendor, etc. that you paid $600 or more to throughout the year in your business.  This can include payments for rent, services, prizes, legal, etc.  Any personal payments you made are not reportable.

Now, there are also some exceptions where you may have a paid a person or company $600 or more, but are not required to issue a 1099-MISC to them.  Those exceptions include:

  • Payments to C or S Corporations
  • Payments for merchandise, freight, or storage
  • Payments of rent to real estate agents or property managers.  Note: If you paid rent directly to the property owner then it would still be required unless another exception was met.
  • Payments made via credit/debit card or PayPal
  • Payments made to employees — These would be reported on a W2 instead

Note: The C or S Corporation exception does not apply for payments to attorney’s.

Where Do I Get the Information to Fill out the 1099-MISC?

If this is your first time looking at a 1099-MISC you probably are starting to realize that you likely don’t have the necessary information to fully complete the form.  You not only need to know the amount that you paid the payee throughout the year, but you also need their full name or business name, address, and EIN or Social Security information.  Fortunately, the IRS has a form that you can send your vendors to fill out so you can gather this necessary information.  That form is called a W-9 and you can get a digital version directly from the IRS website here.

How Do I File and When Is the Due Date?

You can file your 1099’s to the IRS on magnetic media or on optically scannable forms—OCR forms.  However, it is much easier to use an online service.  You can talk to your tax professional and have them file them for you or simply search Google for 1099-MISC preparation and filing software and find products like Track 1099 to assist you.

Now, this is the important part, you must have your 1099-MISCs mailed or given to your recipients and submitted to the IRS no later than January 31st.

What If I Just Don’t File?

Failure to file a required information return can be as much as a $270 per return penalty.  That penalty can be reduced if you file it within a certain time period.  Either way, it is a fairly easy thing to do, so just be sure to get it done.

My Books Are a Mess, I Have No Information, Now What?

If you are in this scenario, you are like many other business owners.  Unfortunately, you will have to suck it up and put in the grunt work now to get your books in order and get those 1099s filed before the deadline.  Take this as a lesson, and follow some of our tips below so that next year you are fully prepared.  Here is a quick hit list you can start to implement now to help relieve some stress next January:

  1. Have a Solid Bookkeeping System – Make sure you have a good set of books to help track expenses and vendor payments. This is something that will not only help with 1099s and tax season, but it can help you better manage and grow your business throughout the year.
  2. Always Collect a W-9 Up Front – Whenever you are paying an outside vendor, regardless of the amount, ask them for a W9. You can then store this on file so it is ready come January.  Many businesses don’t expect to pay someone $600 but after doing a job here and a job there, at the end of the year they pass the $600 mark and forgot to initially grab a W9.

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