In speaking to several of our clients that are new business owners, I've realized just how confusing the 1099 process is to most. So let me break it down for you!
If you (as an individual or small business) pay any person or independent contractor—corporations not included for services performed by someone who is not your employee (including parts and materials) greater than $600 in a year then you owe them a 1099 at tax time. So what is a 1099 and how do you file it? A 1099 is a tax form that informs the IRS and the receiver that the receiver has taxable income. It needs to be filed with the IRS by January 31st of the year after the payments occur. In order to property file a 1099, you need to request a W-9 from the person you are paying. You can read the full, very detailed and accountant lingo guidance from the IRS here. Or you can read the quick and dirty as written by a real person below.
Here's what Salt Creek Consulting's tips when it comes to getting your 1099s filed.
Get the W-9 before tax time. If you wait until after the work is done, it will be very hard to track down the information you need 9 times out of 10. That's because no one really wants a 1099.
It doesn't matter how you pay someone, if they fall under the 1099 rules. If you pay them cash "under the table", that cash is still income to them and should be reported.
There are several types of 1099s. The 2 most common are 1099-NEC (non employment compensation) and 1099-MISC. The 1099-NEC is a new form within the last few years. I found this article really helpful in determining the different types and what you should file.
Is your independent contractor really an independent contractor? Ever heard of the duck test? No? Let me explain. If it looks like a duck, quacks like a duck, waddles like a duck, it's a duck. If your independent contractor reports to you for direction, you tell them when to work, what work to do, what uniform to wear, etc. they are likely an employee. Add them to payroll as a W-2 employee, pay the employer taxes, do the work. It's a lot easier to do that now than to get caught and have to pay back taxes on their wages (back taxes that you could owe to both Federal and State authorities).
So what are the consequences to you if you don't follow the IRS regulations on 1099s? You could go into bad standing with the IRS and rack up penalties - and no one wants to do that. If you miss that Jan 31 deadline by 30 days, the fine is $50 for each form, but it can go up to $260 if you do not submit the documents by August 1. If you ignore sending 1099 forms completely, you get a penalty of $530 minimum for each form, and the IRS does not have a maximum fine limit. Contact us today to help you get your 1099s filed by the deadline. You can always schedule a meeting at https://calendly.com/brooke-saltcreek
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