When to Issue a 1099

A 1099 form is used to document wages paid to a freelance worker or independent contractor. While many business owners aren't sure when to issue a 1099 form to an independent contractor, doing so is an important part of tax compliance. Here's what you need to know about this important documentation for freelance workers.

1099 Rules for Business Owners in January 2017

Because there have been several updates and changes to 1099-MISC forms in recent years, many business owners are confused about these regulations. In general, you have to issue a 1099-MISC tax form whenever:

  • You pay an individual at least $600 over the course of a year, provided this payment or payments was for a prize, rent, or service (including materials or parts).
  • A lawsuit settlement that you have paid out also requires you to issue a 1099-MISC.
  • This form is not required for personal payments, only for business payments.

Penalties for not providing a required 1099-MISC form range from $30 to $100 depending on when you finally issue the form. The cap on this penalty is $1.5 million annually per business. In addition, businesses who refuse this requirement are charged a minimum fee of $250 per form.

Who Requires a Form 1099?

This form needs to be sent to subcontractors and vendors to whom you paid more than $600 in a calendar year, including all estates, individuals, limited partnerships, or limited liability companies?

Who Is Considered a Subcontractor or Vendor?

Any non-employee who you paid for a service.

Are There Exceptions?

Yes; vendors who operate as C- or S-Corporations do not require a 1099. You do not need to send this form to vendors of storage, freight, merchandise, or related items or when rent is paid to a real estate agent. Payments made by PayPal or another third-party network, gift card, debit card, or credit card also don't require a 1099. That's because the card issuer or network is reporting these payments using Form 1099-K.

There are also special rules for lawyers; you need to send your lawyer a 1099 for payments of more than $600 even if she is incorporated.

A smart strategy for business owners is to ask for a W-9 up front for any vendor to whom you will pay more than $600 in a year. This form provides you with their tax ID number and mailing address, as well as whether they are a corporation.

It's important to note that you must pick up 1099 forms from the post office or an IRS service center. They cannot be downloaded from the IRS website. All 1099s need to be submitted along with a 1096 form within one month.

Deadline to Payees

Taxpayers must mail Form 1099 to vendors by Jan. 31. The transmittal form is due to the IRS by Feb. 28. If you have an accountant, he or she can submit these forms electronically by March 31.

Deadline to IRS

Jan. 31 is a new deadline, so don't get it confused with the previous end-of-February deadline. Also, check with your state to determine whether you need to file a 1099-MISC form. If you miss the deadline, talk with your accountant.

Rules for Foreign Workers

A 1099 is required for any worker who is not a U.S. citizen. It is the onus of the business owner to determine whether a contractor or vendor is a citizen. You can ask them to fill out Form W-8BEN for this purpose.

Procedures for 2017

Getting a Form W-9 from all vendors in advance keeps you from having to track down their EIN and/or mailing address at tax time. Not filing the forms on time could result in major penalties. If you're running late, check with accountants, many of whom perform this service in January quickly and at an affordable rate.

What's an Independent Contractor?

Temporary workers that provide services or goods to a company based on contracted terms are considered independent contractors. An independent contractor might also be called a temporary worker or 1099 employee. They can be corporations, companies, or individuals. Independent contractors are usually compensated per project. As an employer, you are not responsible for their tax withholdings, which can often make it cheaper to use a freelance contractor than it is to hire a full-time, permanent employee. Correctly classifying your workers and submitting the right forms allows you to avoid steep fees and penalties from the IRS.

So How Do I Prepare the 1099 Forms?

To correctly prepare your Form 1099s based on IRS rules, use these seven easy steps.

1. Check Work

Confirm that you have the correct information for each contractor or vendor. Complete the W-9 form for each. Consider talking to each contractor to ensure no information has changed since they filled out the W-9. If they have not filled out a W-9 or if the information is missing, you are allowed to withhold 28 percent of their pay and send it to the IRS.

2. Gather 1099s

You have to use specific forms picked up from the post office or IRS center; downloaded and printed versions are not allowed. You can also create your own 1099 forms using a software program such as QuickBooks, or order forms from your local office supply store.

3. Complete Forms

You'll need to write in your federal tax ID number, the contractor's SSN or EIN, and the amount of money you paid the contractor or vendor this year. If you withheld any state or federal income tax from these payments, fill in either box 4 or 11. Then complete the contact information forms. This must be done for every contractor you paid more than $600. That's why it makes sense to use financial software that can create these forms; you'll save time and lower the risk of error.

4. Submit the Forms to Each Contractor

Do so no later than Feb. 1 to avoid IRS penalties.

5. Send the IRS Form 1096

This form summarizes the totals from all your 1099 forms. Paper copies must be mailed no later than Feb. 29 or online forms submitted no later than March 31.

6. Document Your Filing

Save Copy C for your records.

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