Form 1099 is an Internal Revenue Service (IRS) document that is used to report certain payments to the recipient and, importantly, also to the IRS. The obligation to report is imposed on the payer under the Internal Revenue Code. While there are many types of Form 1099, each used to report a different types of payments, one of the more common is the Form 1099 MISC used to report miscellaneous income for individuals and companies who have been paid $600 or more in non-employee service payments during a calendar year (royalty payments are reportable at $10 or more per calendar year).
Examples of “persons” (individuals/partnerships/LLC’s) who would receive a Form 1099-MISC form include:
- independent contractors providing services
- guest speakers
- health care/medical care service
While a Form 1099 has some conceptual common ground with the Form W-2, used to report earnings and tax withholding for employees, it is important to note that compensation payments to employees are not reported on Form 1099.
Important considerations for the business owner:
- Ensure you have IRS Form W-9 (“Request for Taxpayer Identification Number (TIN) and Certification”) on file for every non-employee payee. This must be provided to you by each payee certifying the type of payee (e.g. individual, corporation), their tax identification number (TIN), and their certification that the payee is NOT subject to backup withholding. It is also important that this form is signed by the payee or the payees authorized representative so you can rely on this information to determine your reporting and potential withholding responsibilities, if any. Occasionally payees will insist they don’t need a Form 1099 and be reluctant to provide the W-9. However, it is important to consider the IRS requires them to provide you this information and the IRS requires YOU to have this information on file for your payees. It is not up to the payee to make the determination on what is and what is not required. Continued resistance to provide this information may give reason to rethink the vendor choice.
- Identify payees that should receive a Form 1099 MISC. Most current accounting software has functionality to automate this process.
- Carefully review independent contractor relationships, especially when the payee is an individual and not an entity. Misclassification of “employees” as independent contractors is a current hot topic with, among others, the State of California and can have significant financial ramifications for the payer (de facto employer) on several fronts.
- Prepare, review and file. The annual filing of Form 1099-MISC is due to payees by January 31 of each year for the prior calendar year. Note that you will report on a calendar year regardless of your fiscal/tax year. The filing to the IRS is generally due by February 28. TGG recommends that the forms are sent to the payee, and the time between payee and IRS filing dates is used to resolve questions, comments, etc. as revisions can be easily made prior to the IRS filing. There are several methods of making these filings including computer printed forms, hand written forms, and on-line services.
At TGG we believe that the IRS and state revenue agencies will continue to impose increased reporting requirements on payers, expanding the base of payees that are “reportable,” the transactions that are reportable, and also lowering the threshold to require electronic filing of Form 1099 MISC as these agencies look to tighten the perceived compliance gap on income reporting. With that in mind, it is essential that businesses have a solid game plan to ensure effective compliance in a cost efficient manner. As discussed above, it starts with the W-9 and the discipline to not remit a payment to a non-employee until you have a properly completed, signed W-9 on file.
TGG regularly assists clients to determine and meet their filing requirements for Form 1099 as well as Form W-2. Please contact us if you have questions or concerns on this or would like to discuss your current approach and processes.Written by: Scott Palka TGG Accounting