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.
