If your small business regularly uses independent contractors or just hires a gardener once in a while, you may need to file a Form 1099-MISC with the IRS. 1099’s help the IRS prevent tax evasion by creating a record of income that may otherwise go unreported. For that reason, there are tough penalties—including fines up to $550 per 1099, if you don’t file your forms accurately and on time.
When do I need to file a 1099?
The general rule is that whenever you hire an independent contractor for your business and pay them more than $600 during the year, you should file a 1099-MISC with the IRS and provide the contractor with a copy. An independent contractor might be someone you routinely hire to do specialized work, or it might be a plumber you’ve hired once.
There are a few common exceptions to the rule for filing Form 1099-MISC:
- Payments to corporations
In general, you don’t report payments that your business made to corporations except for very specific types of transactions, including but not limited to payments for medical services or fees paid to an attorney.
- Payments reported on Form 1099-K
You usually don’t have to issue a 1099-MISC when you pay for services via credit card or other online payment platform like PayPal, since the payment processor will usually report that transaction on Form 1099-K. A 1099-K is essentially the same as a 1099-MISC except it’s filed by the payment processor rather than the business making the payment. You can usually find out if you’re paying through a 1099-K reporter by searching “[payment processor name] + 1099-K.”
- Hiring contractors on third-party platforms
One practice that is becoming more prevalent among small business owners is hiring contractors online. The terms of service will vary across different providers, but generally, when you hire through a platform, you are paying a corporation rather than the individual contractor; or your payments are going through a payment processor that files a 1099-K. In either of these instances, you normally wouldn’t have to worry about filing Form 1099-MISC.
If you have questions about how to classify contractors or whether your specific payments qualify, it’s best to speak with a lawyer.
Before filing Form 1099-MISC
In order to file a 1099-MISC, you will need to request a W-9 from the person you’re paying. A W-9 form provides their name, address, and taxpayer information like Social Security or Employer Identification number.
If someone refuses to provide you with a W-9 or their tax information, follow the instructions in IRS Publication 1179. Generally, you would file a substitute 1099-MISC with as much information as you have available. You may also need to follow the IRS backup withholding rules.
How to file Form 1099
In most cases, you need to file each 1099-MISC by January 31st each year. It should contain the total amount you paid the contractor during the previous calendar year.
You’ll generally want to file your 1099’s electronically. You can’t do this on your own and need IRS-approved software. Many accounting and payroll software providers that handle 1099’s include e-filing.
If you decide to file by mail, you’ll need to order official forms from the IRS rather than printing your own. You’ll also need to include a Form 1096 cover sheet.
How can I protect my business?
When dealing with contractors, it’s critical to keep good records. Store your tax forms securely and log all payments in your accounting software including the amount paid, to whom, and when. Save all of your receipts and invoices, as well.
If you have any questions or want to make sure you’re doing everything correctly, talk to an accountant or tax lawyer. Do this as early as possible so that you can properly prepare for tax season and don’t have to scramble to fix any mistakes at the last minute.
Charley Moore is the founder and CEO of Rocket Lawyer, the simple and affordable online legal service that is used by millions of businesses, entrepreneurs, lawyers, and individuals for any legal situation, worldwide. Follow @RocketLawyer for more helpful legal information.