Every year when tax time rolls around, I field questions from business owners about whether or not they need to send 1099s to their vendors. As common as 1099 forms are, they remain one of the most misunderstood Internal Revenue Service (IRS) requirements.
To make sure you understand the circumstances under which the IRS requires issuing 1099-MISC forms to vendors, I’m going to provide some basic “must-know” information here.
What Is A Form 1099-MISC?
You must issue an IRS Form 1099-MISC to each person you’ve paid $600 or more in services (including parts and materials), prizes and awards, rents or other income payments. The 1099-MISC only applies to payments you made in doing business; it does not apply to payments made for personal purposes.
To Whom Do You Need To Send A Form 1099-MISC?
If your business paid more than $600 to a vendor or sub-contractor [individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or estate], you are required to send a Form 1099-MISC to document what you paid them throughout the year. In general, anyone who worked for you—other than your employees—will need a 1099 from you.
Also, unless an exception applies to them, you need to issue a 1099 to your landlord if you are paying rent for business purposes. You must also issue a 1099-MISC to your attorney if you paid for legal services that amounted to more than $600 during the year.
Are There Any Exceptions?
There are. The list is rather long, but most commonly these types of vendors do not get 1099-MISC forms:
- Those with S Corporation or C Corporation business structures.
- LLCs taxed as C Corporations or S Corporations.
- Those who sell merchandise, storage, freight, or other similar things.
Also, you don’t have to send 1099-MISC forms to vendors to whom you made your payments via a credit card, debit card, gift card, or a payment network like PayPal. The onus to report vendor compensation is on those payment companies.
How Do You Figure Out If A Vendor Needs A 1099 From You?
I recommend before you request vendors to do any work for you, ask them for a completed W-9 form. The W-9 will give you all the information you need for filing taxes. It supplies a vendor’s mailing information, Tax ID numbers, and business structure (so you’ll know if the vendor is incorporated or not and does or does not need a 1099).
When Is the Deadline To Send 1099s?
By January 31, 2017, you must do two things to comply with your 2016 tax year 1099 obligations:
- Submit Form 1099 to each vendor (reflecting what you paid that vendor in 2016).
- Submit a copy of the Forms 1099 you sent to each vendor, along with a Form 1096 that discloses in total what you paid to all vendors who received 1099s from you.
Make sure you check on your state’s rules, too. Some states require they also receive your 1099s.
What Happens If You Miss The Deadline?
Sending the required 1099-MISC forms late (or not at all) could cost you. The penalties vary depending on how far past the deadline you wait to issue the forms. If your business had gross receipts of $5 million or less, the amount you’re smacked with could range anywhere $50 to $260 per form (for tax years 2016 and 2017). If you’re caught intentionally not providing a payee with a correct statement for tax year 2016, you could face a fine of $520 for each form not submitted (that amount will increase to $530 for tax year 2017).
Where Can You Get 1099 Forms?
Unfortunately, you cannot download 1099 Forms from the IRS website. You can, however, order them from the IRS site and have them mailed to you, or you can pick them up at an IRS service center, post office, or another location that supplies them.
Eliminate Headaches—Do It Right From The Start!
Whether you’re in the early stages of launching a startup or already running a small business, I recommend you talk with a tax professional who can share more details about 1099s and the other aspects of filing your tax returns.