I like this overview by TurboTax because it sets a clear outline of the topic. Watch it and then check out the discussion below.
One of the most common practices or I should say non-practices I saw during my career with Treasury was the way in which businesses exposed themselves to needless penalties by not having a working understanding of when to issue a 1099-misc.
Our purpose here is to take the guesswork out of what to file and when to file it.
Now I don’t want to make you think that there are 1099-misc police hiding behind every bush ready to pounce but if you ever find yourself on the wrong end of the discussion, you may have a rude awakening.
Penalties can be severe…ranging from $30 to $100 per 1099 form depending on how long past the deadline you are before issuing the form. There is a cap of $1.5 million for the year which will normally be applicable to the larger companies but who wants to pay any penalties regardless of the amount.
Oh by the way, if you intentionally disregard the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.
Once you realize that this is a no-nonsense item, you will also realize that you need some guidelines. As you read this, it may occur to you that if you handle your transactions in cash, you can get around this whole process. Before you start down that slippery slope, let me give you a link to the drama of Miss Lindsay Lohan http://www.dailyfinance.com/2012/12/07/getting-paid-in-cash-dont-end-up-like-lindsay-lohan/
With that out of the way, let’s cover three general rules that apply. Remember we are talking about payments made in the course of your trade or business; not anything paid for personal reasons.
First, as mentioned in the video, the accounting of payments of payments is in the aggregate not on a per item basis. When payments to any individual, partnership, Limited Liability Company, Limited Partnership or Estate, total $600 or more, you are required to issue a 1099-misc.
Also, you must issue a Form 1099-MISC to each entity to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments.
Second, be smart! As a normal business practice get the vendor’s mailing information, Tax ID number, and also require the vendor indicate if it is a corporation or not. This will save you the headache of sending them a 1099 next year.
You can get this information by requesting a W-9 Form from anyone you expect to pay at least $600 to during the year. Download here: http://www.irs.gov/uac/Form-W-9,-Request-for-Taxpayer-Identification-Number-and-Certification
Third, remember the deadline! You are required to issue and essentially mail out all of your Form 1099s to your vendors by January 31. Then you have to send in the transmittal Form 1096 to the IRS before February 28. Check your state law to see if you are required to submit to the state.
These forms are pre-printed in triplicate by the IRS so in order to comply, you will have to secure the paper forms as they are not downloadable from the website. If you have a sizable volume, you may want to outsource this to an accountant.
If you have a manageable volume, order the forms from the IRS or another outlet. If you are early enough, you can generally secure from the Post Office when they become available.
Lastly, there are exceptions to the requirement. The most common are that you don’t need to send to a corporation or to real estate agents who are managing property. Additionally, sellers of merchandise, freight, storage, and similar items are exempt. Oddly, you must send to your lawyer if they meet the threshold. Probably has something to do with trust…
That is it in a nutshell. These are the basics but as always, there is something more. Provisions cover foreign workers and your responsibility to determine their status as a U.S. citizen, etc. While this is beyond the scope of this article, I suggest that you become familiar with the provisions as they arise.
For further information, TurboTax tips can be found on the YouTube but for a more professional face-to-face FREE consultation, check out my friends at Elevation Tax: FREE Consultation
To your success!
p.s. while you are here, don’t forget to check out the Tools for Success page for resources! Check back often to watch it GROW!