Background:

Each year businesses are required to issue information returns (i.e. 1099 forms) reporting various types of payments, or in some cases receipts. Unless you happen to be a University or a Bank, most of the forms you will be sending out will probably be the 1099-Misc to report payments for services by non-employees.

The general rule is that if a business pays an independent contractor $600 or more in a calendar year for services, you must give them a 1099 showing the total amount paid. These forms must be sent to the recipients by January 31 of the following year.

Failure to issue the requisite 1099 form can result in large penalties ranging from $50 to $270 per form. If the failure to issue a 1099 is determined to be willful, the penalties escalate to a minimum of $550 per document.

Where it really gets sticky is if you do not have a correct Taxpayer Identification Number (TIN) for the recipient. If you cannot obtain a SSN or FEIN from the payee, or the one provided turns out to be incorrect, you are required to withhold taxes at a 24% rate. Failure to do so may make you responsible for those taxes.

Solutions:

Now is the time to obtain TINs from vendors. They are more likely to give you the info before they are paid than after. Providing them with a W-9 form to fill out and return to you before you issue payment will make the process much easier after the end of the year. Most accounting software will capture this data and create a 1099 report for ease in preparing the filings next January.

Alternatively, treating payees as employees may be appropriate. A recent court case (Dynamex) strictly defines true independent contractors in California and makes it much harder to argue many types of relationships aren’t employer-employee relationships.

The 1099 reporting rules are lengthy. For more information you can contact one of our team, or see the instructions at: https://www.irs.gov/pub/irs-pdf/i1099gi.pdf