These days businesses rely on additional services from contractors and freelancers for tasks that don’t require employee headcount. This means that it’s essential for them to understand IRS rules and varied prerequisites for issuing 1099-MISC forms in their businesses. Unfortunately, a lot of business owners “wing it” when it comes to following the rules and requirements because keeping up with changes can be so aggravating that many entrepreneurs simply give up. This can be a dangerous and costly move with penalties adding up quickly. Fortunately, filing the 1099-MISC isn’t complicated. Here’s what you need to know.
Generally speaking, you’ll need to issue a 1099-MISC to anyone you’ve paid a minimum of $600 for services related to your business. This includes materials, rent, awards, prizes and other income payments made during the year. You don’t need to submit a 1099-MISC for payments made for personal functions.
A 1099-MISC form helps independent contractors report their earnings to the IRS. It’s similar to a W-2 that an employee receives from their employer.
The IRS requires companies to report payments to the IRS and recipient through a 1099-MISC. The form displays total payments that you provided to an entity or person during the year that you’ve received services for. It contains personal information, including name, address and either employer identification or Social Security number. Beyond the basic personal information, it classifies every type of payment in individual boxes on the form based on the grounds for your payment. For example, if you paid for contract work the annual earnings should be acknowledged as non-employee compensation.
Business Legal Obligations
There are a wide range of transactions that require you to submit a 1099-MISC to the person or entity who received your payment. A few of the most common transactions include paying:
- $600 or higher in compensation in exchange for services rendered
- $600 or more to a law firm or attorney for legal services
- Payments you make to rent commercial real estate, like a warehouse or office.
- $10 or more in royalty fees
- Awards or prizes of $600 or more
- Direct sales of at least $5,000 of consumer products to a buyer for resale through a non-retail establishment
In addition, if you ever end up paying a lawsuit settlement, you’ll be required to report all of the payments you make apart from the ones that compensate an individual for their physical injuries or medical expenses.
In order to avoid IRS penalties, it’s important to be aware of reporting deadlines for the 1099-MISC. You’ll need to give the recipient of the payment a copy of the 1099-MISC no later than January 31st, right after the end of the tax year that you made the payments in. In addition, you’ll need to file the 1099-MISC with the IRS by February 28th. The IRS may give you more time if you file electronically.
Setting up processes and systems to issue 1099s can help you save time and money every year. If you’d like to discuss how I could help your business improve productivity and efficiency, schedule a free consultation here.