The New Year has arrived, and with it, the 1099-MISC filing season. Many small business owners and their accounting staff fear this half-page tax form, and understandably so. The 1099-MISC looks simple but presents surprising complications.
If the 1099-MISC were required for all payments to all recipients, it would be burdensome, but simple – businesses could simply issue the form to every vendor and be done. However, while one rule is simple – for most types of payments, you don’t have to issue to any recipient you paid less than $600 – the rest are less straightforward. A 1099-MISC is only issued for some kinds of payments, only to some kinds of recipients, and, since 2011, only if made via some forms of payment.
1099-MISCs only need to be issued to:
- 1) Individuals (other than employees to whom you issue a W-2).
2) Businesses that are not corporations – e.g.: sole proprietorships or partnerships. This used to be easy to know – but the emergence of the LLC form in the 1990s has complicated matters. A business organized as an LLC may or may not be taxed like a corporation. If an LLC were taxed like a corporation you would not need to issue the 1099, but, more often than not, LLCs elect to be taxed like a partnership or a sole proprietorship. For this reason, we would advise you to always issue include LLCs as a 1099-MISC recipients.
- 3) Law firms, whether or not they are incorporated. We’ll talk more about payments to law firms in the following section.
Types of 1099-MISC payments
The most common reportable payments types are:
- 1) Rents – for real property or for equipment.
- 2) Services provided by businesses or independent contractors, including payments for incidental materials used in the course of providing the service.
- 3) Other taxable payments, such as prizes, awards and other income.
- 4) Payments to an attorney or law firm for legal services.
- 5) Gross proceeds of $600 or more paid to an attorney or law firm made in connection with legal services but not for legal services provided to the payer. For example, payments of gross proceeds could include payments made to an attorney or law firm pursuant to a settlement agreement. Payments of gross proceeds are reported in box 14, whereas payments for legal services (discussed in item 2) are reported in box 7.
You do not need to report payments for equipment, supplies, or other tangible goods, including inventory.
Types of 1099-MISC payment methods
In 2011 the IRS instituted an exception to 1099-MISC reporting for payments made via credit card. Starting with the 2011 tax year, credit card payments are now reported to recipients on Form 1099-K by the credit card processor. The IRS therefore no longer requires you to report any payments that you made via credit card to your 1099-MISC vendors.
Filing dates and electronic filing requirements
January 31st: 1099s must be mailed to recipients
February 28th: Government forms must be filed. Penalties may be assessed for late or non-filers. These penalties increase over time so it’s generally better to file late than not at all.
March 31st: If you issue more than 250 forms, you must file them electronically. And beginning in 2014, some Oregon businesses will be required to electronically file their 2013 1099 forms. The IRS and Oregon e-file deadline is March 31st.
1099 tips and best practices
Here are a few things you can do to prepare for the 2013 filing season:
- 1) Review your current vendor list to identify potential 1099 vendor candidates.
- 2) Mail any vendor for whom you do not have a tax ID number a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification to complete and return to you. The W-9s will provide the tax information you need to know about your vendors including their legal name, tax identification number, address, and their federal entity classification. Note that vendors with corporate federal entity classifications can be eliminated from your 1099 vendor list.
- 3) Most accounting software includes features that allow users to flag 1099 vendors, record vendor TINs and generate year-end 1099 reports that make populating the 1099-MISC form a breeze during filing season.
- 4) From now on, when you set up a new vendor in your accounting system, always ask whether that vendor could be a 1099-MISC recipient later. If the vendor is an individual, an unincorporated business, or an LLC, and the vendor will be providing services to the company, designate them as a 1099 vendor at the time they are set up to receive a payment. Also, be sure to request that they fill out a Form W-9 right away. That way you will have their identification number long before you will need it to fill out the 1099-MISC.
Want to know more about information reporting? We cover even more about 1099s and quite a few other information reporting requirements in our “Annual Information Returns & Other Compliance Reminders” letter. The instructions to Forms 1099-MISC and 1099-GEN are also excellent guides to have at your fingertips. Or, if you would like assistance with your 1099s this year, contact us and we are happy to help.This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern. Based on the most recent “best practice” standards for tax advisors issued by the Treasury Department, commonly referred to as Circular 230, we wish to advise you that this blog post has not been prepared to be used, and cannot be used, to provide assurance that penalties which may be assessed by the IRS or other taxing authority (including specifically section 6662 understatement penalties) will not be upheld.