Don’t you wish the IRS would start giving its forms friendlier sounding names? I mean, let’s stop with the letters and numbers and start with a name that actually tells you something.
Form 1040? How about Personal Tax Return.
W-2? Let’s go with End of Year Paycheck and Withholdings Summary.
1099? Reporting What You Paid to a Non-Employee for Business Services. There, that sounds better.
Since the IRS isn’t going to up and change its form names anytime soon, I’m going decode the who, what, why, and how of the 1099, a form that you might be required to file.
Let’s get into it (and don’t forget to download your 1099 tracking sheet to stay organized at tax time):
The first thing is understand is what the heck this form is. The 1099-MISC is a form that sole proprietors, LLCs, S-Corps, Partnerships, Non-profits, Corporations, B-Corpations, any and all businesses, are required to file at the beginning of each tax year. It reports (tells the government) that you paid an individual, non-employee $X in income. If you are writing these services off on your taxes, you must file a 1099.
The 1099 is sent to three people:
Your state government
The 1099 must be sent to the individual you paid and filed with the government by January 31st.
There are two other types of 1099 forms, 1099-B and 1099-S, which have to do with stocks and real estate transactions. I am talking about the 1099-MISC. When people talk about “A 1099” or “My 1099s” they are almost always referring to the 1099-MISC.
Any individual, non-employee you pay more than $600 for business services and who you did not pay through a credit card or PayPal. Ok, there is a lot in that sentence. Let’s break it down.
A 1099 is for a:
A non-employee is someone who is not on your payroll. You are not paying employer taxes on this person. This is someone you contract for services. Such as:
You do not send 1099s to S-Corps, C-Corps, and Non-Profits. Only individuals, LLCs, and partnerships.
Pay more than $600 for business services
The important part here is that if you plan to write off the services on your taxes you need to file a 1099.
Let’s go back to Rad Web Developer Sole Proprietor. This is for your business website and you’re going to take the deduction. You must file a 1099 for this person. Rad Web Developer Sole Prop’s sister is a dog walker. You hire her to walk your dog weekly, which is in no way related to your business. Do you need to file a 1099? No!
And who you did not pay through a credit card or PayPal
If you paid your contractor through PayPal or a credit or debit card, then you don’t need to file a 1099 for them. That’s because the contractor’s credit card processor will file a special type of 1099 for them, reporting how much money they processed in the year. But, you DO need to file a 1099 if you paid someone via:
Zelle or any other bank to bank wire transfer system
Simply put, the IRS doesn’t like it when people don’t report their income. The 1099-MISC is meant to keep people in check.
You’ve probably received a 1099 as a contractor. If you were planning on self-reporting the income then you were like, “Why do I need this?”. If you weren’t planning on reporting the income, you were probably like, “Awwwww- man.”
The 1099 forces people to report their income. It’s filed with the federal and state government. The money you paid someone in business income is on record. If that person doesn’t report the income, the IRS has proof that the individual is evading taxes.
But what if you’re like, “I really like Rad Developer and I don’t want her to pay for taxes on what I pay her.” Then you need to consider whose business you value more- yours or hers.
If your return shows $3,000 paid in subcontractor services and the there are no 1099s on file with the government, that looks suspicious. If you are intentionally not filing your forms in order to help someone evade taxes- that’s even worst.
We all have responsibilities as small business people (even Rad Web Developer) and one of those responsibilities is to accurately report our income and pay our taxes.
1099s are actually really easy to file. You can use an online service and file electronically. For a small fee (less than $5 a return) these services will:
E-file your returns with the federal government
E-file your returns with the state government
Mail a copy to the 1099 to your contractors
Email a copy to your contractor
Give you a PDF copies of all your returns for your records
Some good filing companies (which I’ve personally use) are:
Here are the steps to filing a 1099:
- Collect information from your contractors
Before you file your 1099s need to collect information from your contractor. The easiest way to do this is through a W-9 form (download it here: https://www.irs.gov/pub/irs-pdf/fw9.pdf).
The great thing about the W9 is that is collects your contract’s information, Tax-ID number and they must disclose what type of business structure they are under. Right away you’ll know if you need to file a 1099 for them!
When is a good time to send your contractor a W-9? With your initial contract or before your first payment. Don’t wait until January to get this info. It’s really stressful. I know- I’ve filed 1099s at 11:55pm on January 31st because contractor’s haven’t returned their W-9s until then.
At the very least, collect your contractor’s information before the end of the year and keep all your W-9s together in a file.
2. Calculate how much you paid your contractor
Some accounting programs, like QuickBooks, make it really easy to track 1099 contractors and will run reports showing who you paid more than $600. With other programs you can run a simple name search and add up all the payments you made to that person.
3. Fill out the 1099 form
You are going to provide the following:
Your business information, including your federal identification number (if you don’t have a EIN this is your SSN)
Recipients information (everything you need will be on the W9)
The amount you paid the contractor- put this in BOX 7- NON-EMPLOYEE COMPENSATION
And that’s it! Press file and you’ve done it!
How you feeling now? Hopefully the 1099 has gone from big and hairy with pointy teeth to actually kinda cute. Okay, maybe not cute, but at least less intimidating, less mysterious, and more DO-able!
What do you need to do right now to get organized to file your 1099s? Make a list of each task. Do one task today. Do one task tomorrow.
Keep Your 1099s Organized
Get your free 1099 Tracking Sheet and never miss another 1099 filing again