Time to Send 1099s

The 1099 can be mysterious. Business owners guess at its rules and requirements. Tracking changes to the procedures  can be so exasperating, some entrepreneurs just give up and file nothing at all. This can be dangerous as penalties can add up quickly. But the 1099 doesn't need to be complicated. To help simplify things, here are the basics.

To whom are you required to send a Form 1099? As a general rule, you must issue a Form 1099-MISC to each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don't need to issue 1099s for payments made for personal purposes. You are required to issue 1099 MISC reports only for payments you made in the course of your trade or business. You'll send this form to any individual, partnership, Limited Liability Company, Limited Partnership or Estate.

What are the penalties? The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.

What are the exceptions? The list is fairly lengthy, but the most common is that you don't need to send a 1099 to corporations or for payments of rent to real estate agents (typically property managers -- yet they are required to send them to the property owners). Additionally, you don't need to send 1099s to sellers of merchandise, freight, storage or similar items.

Lawyers get the short end of the stick. Ironically, the government doesn't trust that lawyers will report all of their income, so even if your lawyer is 'incorporated,' you are still required to send them a Form 1099 if you paid them more than $600.

The W-9 is your "best friend." One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor's mailing information, Tax ID number, and also require the vendor indicate if it is a corporation or not (saving you the headache of sending them a 1099 next year). 

The deadlines. Finally, 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. For those of you that 'outsource' this service, your accountant with the proper system can actually submit the 1096 and stack of 1099s electronically by March 31. Don't forget as well, that depending on state law, you may also have to file the 1099-MISC with the state.

What about foreign workers? Also, if you hire a non-U.S. citizen who performs any work inside the United States, you would need to file the 1099. It is your responsibility to verify that the worker is indeed a non-U.S. citizen, and performed all work outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN.

Moving forward in 2015, make sure to get a Form W-9 from all your vendors before they can get paid. This will save you a lot of headaches next January so you don't have to track down their mailing addresses or EINs.