****UPDATE as of 01/01/21****
The information below was originally written when money paid to independent contractors was reported on Form 1099-MISC. As a result of the The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), independent contractor payments are now reported via Form 1099-NEC effective tax year 2020 (being filed in 2021). The deadline for filing remains January 31st.
While most of the information below for Form 1099-MISC applies to Form 1099-NEC and generally is still relevant, please refer to the YouTube video below for instructions on how to complete Form 1099-NEC.
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If you employ an independent contractor in your trade or business, you are obligated to report their earnings to them and the IRS. This is typically done via the IRS form 1099-MISC. But just who is supposed to receive this form, when is it due and what are the penalties if it’s not filed on time?
Who Receives Form 1099-MISC
Form 1099 goes out to independent contractors if you pay them $600 or more to do work for your company during the tax year. Additionally, those whom you pay at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest should also receive a 1099.
Taxpayers should note that if you earned less than $600 and you don’t get a 1099, this doesn’t mean you don’t have to report the income. All income (it doesn’t matter if it’s $1) is taxable and should/must be reported.
In addition to individuals, you must also send a 1099 to the following if you paid them for doing work:
- Businesses that file on form 1040 Schedule C (i.e. sole proprietors/self employed)
- Single member LLCs, as they are considered disregarded entities (DREs) and also file on Sch C
- Partnerships or Multimember LLCs as they essentially file the same return as a partnership
However, there are some instances in which you don’t need to issue a 1099-MISC. These exceptions include:
- Suppliers of merchandise, telegrams, telephone, freight, storage, and similar items, with the exception of those who deal in fish or other aquatic life
- Corporations (e.g. those who’s names contain Corporation, Company, Incorporated, Limited, Corp., Co., Inc. or Ltd.) are also exempt from 1099 requirements, with the exception of those you pay for medical or health care, or law firms that you’ve hired for legal services
- Those corporations that have filed a S-Corp election with the IRS
- Tax-exempt organizations or to American or foreign governments
Need the specifics on who is exempt and who isn’t and don’t mind reading the Internal Revenue Code? Check out section Treasury Regulations, Subchapter A, Sec. 1.6049-4(c)(1)(ii) where it talks about a corporation, as defined in section 7701(a)(3).
When Is Form 1099 Due?
Generally you must furnish a copy of form 1099-MISC to the recipient by January 31st of the year following when the payments were made. If you are reporting payments in boxes 8 or 14, then you have until February 15th of the year following when the payments were made.
In addition to the recipient, you must also send a copy to the IRS (along with Form 1096) by January 31st IF you are reporting amounts in Box 7 for Nonemployee Compensation. If you are reporting amounts in any other box:
- You must submit it by February 28th of the year following when the payments were made if you are sending it via paper
- If you are submitting everything electronically, then you have until March 31st of the year following payment.
What are the penalties for filing late?
If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The amount of the penalty is based on when you file the correct information return. Currently, the penalty is:
- $50 per information return if you correctly file within 30 days; maximum penalty $532,000 per year ($186,000 for small businesses)
- $100 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,596,500 per year ($532,000 for small businesses)
- $260 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,193,000 per year ($1,064,000 for small businesses)
Obtaining the information needed to file Form 1099
To ensure that you issue a correct 1099 to the recipient, complete Form W-9, Request for Taxpayer Identification and Certification. The W-9 includes the individual or businesses legal name, tax ID number, address and their signature attesting to the correctness of the content. You will then use this information to create the 1099 and send it to the IRS.
Do you have 1099s that you need to file? Shoot us an email at the address below or give us a call at 773-239-8850. Our filing services are extremely affordable (as low as $10/form) and not only will your documents be filed with the IRS, SSA and state, they can also be mailed to the recipient!