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OK, it's January -- time to send out those 1099s to Independent Contractors...

End of January is the deadline to get IRS Form 1099 to recipients to avoid penalties!

It's that time of year again: The SuperBowl for football fans and the FormsBowl for business owners! Although you'd prefer to make an end run around all this paperwork, don't even think of it -- the IRS intends to keep you in bounds, or the penalty flag goes up.

So just what has to be mailed or handed out?

  • To each employee, a W-2 (Be sure to have your bookkeeper or payroll service mail those out. If you have employees, you -- or someone who helps you -- better know what to do, so we won't rehash that here, but remember, you've got to mail a copy to the Social Security Administration, too.)

  • To each independent contractor you paid at least $600 last year, a Form 1099 showing the total paid.

  • Also (in addition to contractors) send a 1099 to any individual you paid over $600 in interest, rent, prizes/awards, royalties or for broker or barter exchange transactions.

Who counts as an Independent Contractor?

An Independent Contractor is a business owner (or a company) that your biz contracted with to do some specific projects or consulting. The contractor provided a specialized type of expertise only when you needed it -- probably intermittently, maybe just once all year. He knew his stuff -- you didn't have to train him. She didn't work under your thumb (or your control). They used their own equipment.

You didn't issue them a regular paycheck, withhold or pay any taxes, or provide any benefits. Since the contractor chose to set up his own shop, he takes the risk of getting (or not getting) enough income, and assumes the responsibility for handling his own taxes and other government dealings.

A few examples of some likely independent contractors:
(But keep in mind that these professionals could still be employees if you direct how/when/where they do their work: their profession alone doesn't define them as independent. Even lawyers can be employees, just like anybody else. For more info on independent contractors, see sources of help at end of this article.)
• Attorneys
• Accountants
• Bookkeeping Services
• Graphic Designers
• Contract Computer Programers
• Computer Maintenance and Repair Services
• Janitorial Companies
• Landscape Maintenance Contractors
• Consultants of various stripes: marketing, human resource, management, etc.

To be sure you understand the important difference, read the official word from the IRS about Independent Contractors vs. Employees.

Now the IRS (and state revenue czars) want to be sure these contractors don't accidentally forget to report any income they received, so the IRS has commandeered YOU to help.

You can't get 1099 forms at the Post Office or online, so order them now.

For submitted 1099 forms, the IRS requires special "machine readable" magnetic media -- they look like carbons -- so the 1099 forms you can print from the IRS website aren't acceptable.

Sources for getting the required forms:

  • Phone 800-TAX-FORM.
    The forms could take a couple of weeks to reach you, so pick up the phone!
  • Try your local IRS outpost -- they might have 1099s available (no guarantee).
  • Check with your CPA's office, maybe they have some to spare.
  • Go to your office supply store -- you'll probably find modestly-priced packages of 1099s.
  • If you just want to get 1099 EXAMPLES, you can download and print "unacceptable" non-magnetic ones at the IRS website . Select "Search for a Form or Publication," then type in "1099MISC." (There are many variations of 1099s indicated by different letters at the end, but the one you're most likely to use is "1099MISC" -- this will be shown as a pdf you can print out. You'll also want to look at a separate pdf, the "Instructions for Form 1099-MISC.)

What and how many forms do you have to get?

  1. First look at your payment records (from last year) to see how many different qualifying contractors you'll need forms for; you'll need one "form" for each 1099 contractor. Ask for 1099-MISC, and get several extra in case you make any errors. (They come several 1099 Forms on one letter-size sheet.)

  2. Also, request FORM 1096. This is the necessary "cover sheet" summary you have to send to the IRS along with your pile of 1099 copies. For some odd reason, you get another month to hang on to this -- you don't need to mail the IRS their 1096 package until February 28 -- but don't forget -- in fact, just mail the 1096 same time as you do the 1099s so you'll have one less deadline to keep track of. (If you've sent out 1099s in prior years, you've probably already received a 1096 to use from the IRS by now; but if you haven't, don't wait -- just order one.)

  3. While you're at it, order some W-9 Forms. You can send them to contractors to request their official contact info for your permanent files.

Just Doing It.

  1. On each 1099-MISC, fill in your biz name and your biz tax ID number, and the contractor's name and tax ID number. (If you don't already have a correct TIN Taxpayer Identification Number from each contractor you use, get it from them now by asking them to sign a W-9 form, so you'll have the info on an official IRS form in their own handwriting.)

  2. Go through your last year's expense records. For each contractor you paid over $600, note what you paid each individual or company. (Your accounting software will list these for you.)

  3. Write that total in Box #7 Nonemployee Compensation. (For rents, interest, etc. put your total in the corresponding box instead of #7.)

  4. There are some other boxes that probably don't pertain to you, but read over the form instructions or check with your CPA to be sure.

What can go wrong?

According to the IRS, you've screwed up if:

  • You're late sending these out ("Late" means your recipients don't receive these by the first days of February.)
  • You don't use the right magnetic paper
  • You don't put the right TIN Taxpayer Identification Number on each form.
  • You don't put enough info so the IRS can figure out the correct name. Put the individual's name AND his or her company's name: for example, list both "Larry Willard" AND "Willard and Sons Construction."
  • You round off the figures to the closest dollar. That's not close enough for the IRS, they want to see the pennies!

What about penalties?

They threaten to charge you $50.00 per form that's screwed up in any way. (But for Small Businesses, the IRS kindly caps your max penalty at a mere $100,000! )

So, assuming you have better uses for your hard-earned money than to pay penalties to the IRS, don't screw up! If you do, try to correct your error -- whatever it was -- as soon as you possibly can and before August 1, at the latest. If you quickly correct your mistake, the IRS may pardon you.

But even more importantly, the IRS issues this caution: "If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty."

Since this issue includes two of the areas the IRS is determined to fix -- unreported income AND employers trying to evade their responsibilities -- it would be a good idea to heed their warning.

The IRS Isn't Alone!

You'll see that one copy of each 1099 is earmarked for "state tax". However, don't just haul off and send these to your state tax department -- many states don't want the extra paper (they just accept what you told the IRS). To be sure you what your state wants, check with your CPA or call your state revenue department.

Need more help or info?

  • Confer with your reliable (though probably frazzled) CPA
  • Read the form instructions from the IRS
  • To keep up with this and other deadlines, check the IRS small business/self-employed calendar online.
  • Check the HELP information in your accounting program. (You do use one, don't you?) Intuit's QuickBooks makes 1099s especially easy.
  • Go have yourself a latte and a bagel to clear your mind and get the strength to keep going.

Remember, we aren't the IRS (thankfully), but we've tried to clarify their expectations for you as best we can -- no guarantees, however, that we have correctly analyzed the IRS mind. Be sure to check with your own CPA for advice that pertains closest to your own specific situation. And good luck -- you'll probably need it!

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