With tax season around the corner, it’s time to start thinking about closing your books out for the year and preparing all your tax documents. If you employ contractors and paid them more than $600 in business-related payments, then you will need to prepare and issue an IRS Form 1099-MISC. While it may seem like a complicated procedure to issue these 1099s, with the right tools and processes in place, it can be pretty straightforward.
But before we conquer the process, let’s take care of the basics.
What’s a Form 1099-MISC? And Whom Do I Send It To?
IRS Form 1099-MISC summarizes income from all non-employee compensation. It’s what independent contractors use to calculate and file taxes. You must send out a Form 1099-MISC to all contractors you’ve hired and paid more than $600 during the year; this includes any partnerships or LLCs you may have contracted throughout the year.
There are a few exceptions to this rule: You do not have to send 1099s to most corporations (note: you must send 1099s to all lawyers you’ve hired, even if they’re incorporated), property managers for rent, sellers of merchandise, etc. See this article for a full list of exemptions.
What’s an Independent Contractor?
Independent contractors are temporary workers that provide goods or services to another company under specified terms outlined in a contract, such as an Independent Contractor Agreement. Independent contractors can be individual workers, companies or corporations. They are typically compensated on a per-project basis, and their employers are not responsible for withholding taxes from their pay. Instead of receiving a W-2 like traditional workers, independent contractors must report self-employment income with a Form 1099.
Because employers don’t have to withhold taxes for independent contractors, it can be significantly cheaper to hire a freelancer rather than a full-time employee. But these tax restrictions make it vital for businesses to correctly classify their workers as either contractors or employees, as misclassification can lead to steep IRS fines and penalties. To determine if your worker is an independent contractor or traditional employee, see our 1099 vs. W-2 Wizard.
Is There a Deadline for 1099s?
Yes! Businesses must send 1099s to all contractors by January 31 (the same deadline for sending out W-2s). Companies must file those 1099s by the end of February if filing on paper, or March 31 if filing electronically.
What’s the Penalty for Missing the Deadline?
The penalty for missing the deadline ranges from $30 to $100 per form, with a maximum fine of $500,000 per year. If a company completely disregards the requirement to provide a correct statement, it could be hit with a penalty of $250 per form, with no maximum.
So How Do I Prepare the 1099s?
Here are seven simple steps to help you prepare your 1099s while adhering to IRS guidelines.
1. Check Your Work
Before you start the 1099 process, make sure you have all the correct information on your contractors. You should already have a filled-out Form W-9 for each contractor, which includes their name, address and Social Security number (SSN) or employer identification number (EIN).
It’s a good idea to check with each contractor to see if any information has changed prior to starting the 1099 process. If the contractor has not provided a W-9 or omitted specific information, the IRS says that you can withhold 28% of the contractor’s pay and send this directly to the IRS; this is known as “backup withholding.”
2. Get Your 1099s
Once you have accurate information to work with, it’s time to get your 1099s. You cannot use a downloaded Form 1099-MISC or a sample from the IRS; you are required to use specific forms that are readable by the IRS scanner that process all 1099s. You can order these forms from the IRS by calling 1-800-TAX-FORM (1-800-829-3676) or going on their website. There are also alternative sources for getting these forms; you can order them from some office-supply stores, or you can use financial software like QuickBooks to create, distribute and file the proper 1099s.
3. Fill Out the Forms
With the information on your contractors and the forms handy, it’s time to start filling them out. Start with your Federal Tax ID number, which could be your SSN or EIN. Then add in the contractor’s information, which includes their SSN or EIN.
Each 1099 should also include the amount of money paid to the contractor, which is entered in Box 7 under the title “Non-employee compensation.” If you withheld any pay from the contractor (e.g. if you had to provide the aforementioned “backup withholding”), you will also need to fill in Box 4 or 11 in relation to any federal or state income tax you withheld.
Lastly, fill in the contact information forms. Repeat this for each contractor you have used. The best part of integrating the 1099 process with your existing financial software is that this information is automatically generated and entered for you, saving you time and reducing any potential for human error.
4. Send Out the Forms
The next part of the process is to send the forms. You must mail or hand each 1099 Copy B to the contractor no later than February 1. Failure to meet this deadline can lead to IRS penalty fees mentioned above.
5. Mail Form 1096 to the IRS
IRS Form 1096 summarizes the totals from your returns, in this case the 1099s. If you file through snail mail, you must mail Form 1096 and Copy A of each Form 1099 to the IRS no later than February 29; if you’re filing electronically, the forms must be sent out by March 31.
6. Keep a Record of Your Filing
Be sure to keep Copy C for your own records in case there are questions regarding the information provided to the IRS.
Preparing and filing 1099s can be very tedious and time-consuming. And while it may seem straightforward, if you employ a number of contractors, the process can quickly become a headache. Use this article as a guide for the process, but if you get overwhelmed, you should look for help elsewhere. Financial software like QuickBooks can help automate the process and save you some time and frustration, and an accountant or tax preparer can also help manage the process.
For more help with managing contractors, see our infographic or our article on the five things you need to know about independent contractors.
This article is intended to provide you with the steps for completing and filing these forms; it does not constitute any type of tax advice. For recommendations related to your overall financial and tax status, contact an accountant.