Who gets a 1099?

It's 1099 season, do you understand the requirements?

In a nutshell, 1099 reporting is how the government keeps taxpayers honest by assuring that they report their income.  The rules around who you have to send 1099s to are changing fast, but here is the current scoop to the best of my knowledge and understanding.

One thing to note: these rules apply to any payments made in the course of business. Personal expenses are not reported. But any payments your business makes are potentially subject to 1099 reporting.

Non Employee Compensation

The biggest 1099-able payments are called non-employee compensation. Think of it this way: if you have a vendor (a person or business you pay) that does something that could have been done by an employee, it probably qualifies as non-employee compensation.  Some typical examples: attorney, accountant, speaker/instructor, janitor, computer wiz, graphic designer, construction worker, plumber, PR company, photographer, ad agency, model, makeup artist, handy man, consultant, coach, business partner,  ...  

It does not matter if the vendor is a person you hired off the street or a thriving business with hundreds of customers.  However, if they are a corporation, you don't have to 1099 them (unless they are an attorney; seems the IRS does not trust attorneys). The exemption for corporations may be going away, so get ready to start 1099ing them too.  LLCs, partnerships, sole proprietors, d.b.a.s, are not corporations.

You only have to issue a 1099 if you made total non-employee compensation payments of $600 or more to the vendor during the year.

So: if (a) your business (b) paid $600 or more (c) to an entity other than a corporation (d) for something that a person does, then you need to issue a 1099.

Other 1099 Payments

Rent - if you rent an office, storage space, or equipment, and pay more than $600 to a non-corporation, issue a 1099.

Royalties - amounts paid for the right to publish or use some intellectual property in excess of $10 are subject to reporting.

Gross Proceeds to Attorney - if you give an attorney funds for something other than their work (which is non-employee compensation) -- i.e., a settlement, escrow, etc. -- that has to be reported regardless of amount.

How to 1099

The first step in issuing a 1099 is to obtain a W-9 from the vendor. It is best practice to always get a W-9 from all your vendors before you pay them. The W-9 will have their SSN or EIN, legal name, legal address, and their business structure (LLC, corporation, individual, etc).

Given the information on the W-9, the amount paid and the payor's legal information, you are ready to create 1099s. One item to note is that you can issue the vendor a 1099 printed on plain paper, but when you send the government their copy you must use the pre-printed forms. There are web services that will create the 1099s and send the info to the government (with the 1096) or you can do it yourself. If you use QuickBooks, there are functions to track your vendors, payments and print the 1099s.

1099s must be sent out by the end of January. There are penalties for not issuing a 1099 or being late. If you get an income tax audit, the IRS may check your reported business expenses against the 1099s you issued.

As a business owner you are likely to receive 1099s as well. You need to make sure your business tax return shows sufficient revenues to cover all the 1099s received. Of course you also have business expenses so a 1099 does not directly increase your taxes, it just provides a floor for your revenues.

Gifts for Employees: are they taxable?

Generally speaking, you must include the fair market value of any gifts or prizes you give your employees as wages, subject to all the usual taxes. There are exceptions though.
De Minimis Gifts - non-cash gifts such as food, event tickets, etc. are "de minimis" (to small to bother with) and not subject to tax as long as they are given infrequently and have nominal value.
Cash - cash and "cash-in-kind" (e.g. gift certificates), regardless of amount, are always taxable as wages.
Parties - company parties are not taxable to the employee. For the business, the cost of an infrequent party which serves to promote employee efficiency or goodwill is fully deductible (not subject to the 50% business meals limitation).

Deducting Meals - Do you know the three kinds?

As bookkeepers, we are responsible to assure that our client's expenses are correctly recorded in preparation for their tax preparer. One huge area of confusion (and complication) is food, meals, entertainment and travel. Here I will try to explain three distinctly different ways that meals are recorded.

We buy food for different purposes at different times. The tax law treats those purchases in different ways depending on the facts and circumstances. The three classifications you need to understand are:

• Travel Meals — these are expenses for food while in "travel status". Travel status is specifically defined and generally means being away from your "tax home" for more than a work day. All meals you consume are 50% deductible up to the per diem limit. (Note: as an alternative, you could pay yourself the per diem and dispense with tracking your actual food expenses.)


• 100% Deductible Meals — expenses incured feeding your employees are often fully deductible as employee expenses. This can include company parties where only employees and spouses attend and meals served at the office for the convenience of the employer. Be sure to write down which employees attended and if anyone other than employees attended.


• Entertainment Meals — the costs of entertaining clients, vendors, associates, etc. are generally 50% deductible and closely scrutinized. If audited, the IRS will want to see documentation as to who attended and why it was "business related."
  

When incuring meal expenses, it is important that a business communicate to their bookkeeper which of these categories the meal falls into. Each is deductible to different extents, subject to different rules, and appear in different places on the tax return.