Small businesses regularly find themselves using contractors for services and products. Then during tax season they find that they are unsure who they must send 1099’s to. This can be confusing because some are exempt from you needing to send one. We always suggest a tax professional to make sure everything is done legally and correctly. The fines can be hefty and damaging to your business.
Who Should Receive A 1099?
There are 3 classifications you should look at when you think you need to send a 1099. 1) Are they an employee or independent contractor. There are many ways to determine this but, do your research to make sure no lines are crossed. 2) Did you meet or exceed the $600 threshold? If not then no need to send one. 3) Whether or not the person or business that you dealt with is classified as a corporation or exempt entity.
What Are the Exemptions?
The IRS labels some entities and people as being exempt from being needed to send a 1099. For example, anyone that was paid less than the $600 threshold. All rental payments made to real estate agents are exempt, as are payments made to tax exempt entities including trusts. The IRS exempts any payments you made to companies for telephone, freight, storage or related items. Payments you made to businesses for the purchase of merchandise are also exempt from reporting. Lastly, most entities that are classified as a corporation are exempt from needing 1099s.
If you have found that you will have to issue a 1099 then you will need that vendor to fill out W-9. This paperwork will have all the information you need to send out the paperwork correctly. It includes the Name, Business name if different than name, Business entity (sole proprietor, LLC, C corporation, S corporation, partnership), Exemptions, Address, Taxpayer Identification Number (Social Security number or Employer Identification Number), Certification: signature and date. You do not send Form W-9 to the IRS. Keep Form W-9 for your records. If you plan on using that contractor a lot and are sure you will pay them more than the $600 threshold it is best to ask for it before the job or before payment to keep it on record.
The deadline for sending out 1099s is the 31st of January. When in doubt it is best to contact a CPA or tax professional who will be able to walk you through the process or point you in the right direction. If you have kept a good record of your books throughout the year you shouldn’t have any problem with tax season. Best to keep in mind a couple things; 1) How much you’ve paid each contractor if they are a 1099 need, 2) If you have a W-9 on file, 3) Record of work such as invoice statements and paid statements for possible audits.