Form 1099 FAQ

Form 1099Form 1099 is something that most people have heard of, seen or even received.  Even those people are not 100% sure about what are they, who gets them, who needs to send them, and why?

What is a 1099?
A 1099 is an information return that tells the IRS about certain types of financial transactions.  The IRS uses 1099s to keep track of earnings or income paid or received other than payroll earnings which would be reported on Form W-2.  The 1099 is used by self-employed individuals, people who receive unemployment benefits, people receiving income from stock dividends or capital gain distributions.

Are There Different Types of 1099s?
Taxpayers should be aware that there are many variations of Form 1099; in fact there are 17 different types of 1099s which are used to report different types of earnings or income. The most common is Form 1099-MISC (miscellaneous income).  The following questions will apply specifically to Fom 1099-MISC.

Who Should File Form 1099-MISC?
Businesses are required to file Form 1099-MISC for non-employee payments of $600 or more made during the tax year.  They are required to send a copy to the person or business to whom they made payment by January 31.  They are also required to file Form 1096 to the IRS to summarize all 1099s issued along with a copy of all 1099s issued.

What is a Business?
For 1099 reporting purposes, a business is an entity that reports income on one of these tax forms Form 1040 Schedule C (sole proprietor or single member LLC), Form 1065 (partnerships), Form 1120 or 1120S (corporations), Form 1041 (trusts or estates).

Who Receives Form 1099-MISC?
Both individuals and businesses can receive Form 1099-MISC.  Anyone who did more than $600 of work for a business for which they do not have an employer-employee relationship with should receive a 1099-MISC.  The IRS also receives a copy of all 1099s.

Exceptions?
The following transactions are not required to report: monies paid to corporations for merchandise, monies paid to the government, monies paid to tax-exempt organizations, and if the total amount paid over the course of the tax year was less than $600.  All payments made to attorneys must be reported regardless of amount or corporate status of the attorney.

What information is Reported on a 1099-MISC?
The 1099 shows name, address, taxpayer identification of both the payor and payee.  It also shows the amount of the transaction which was reported to the IRS.  Since there is no employee-employer relationship involved, there should not be any deductions on the 1099-MISC.

Do Individuals Have to Issue 1099s to Contractors who Repair Their Home?
As an individual, you are not required to issue Form 1099-MISC to anyone who does repair work in your home.  If you hired someone to work only for you in your home on a regular basis (like a housekeeper or nanny), you may be required to pay taxes for this person, who would be considered to be your employee.  Call our office if you need help in clarifying the difference.

Since 1099s are not Required for Corporations, what about LLCs?
The form of taxation selected by the LLC affects how the entity is treated.  If the LLC submitted a Form W-9, it indicates on the W-9 if it is treated as a corporation or not.  If they do not submit any information to you, then you have to assume that they are not exempt from receiving a 1099.  When in doubt, always issue Form 1099 to an LLC.

What if I issue to a corporation by mistake?
If payers do not issue required 1099s, they can face taxes and penalties.  So if you are unsure and issue a Form 1099 to a corporation, the payee does not face any consequences.  There is no harm to you as the payer for issuing an unnecessary Form 1099.

What is the best practice to protect my business?
It is best to require a signed W-9 before releasing any payment for any type of service. This form provides you with the name, address, taxpayer ID and entity type of the payee.  This information will help you decide if and to whom a 1099 may need to be issued.  It is always easier to obtain these forms before a payment is made rather than after-the-fact.

Can you clarify payments made to attorneys and where to put it on Form 1099?
Fees your company pays to your attorney for services are reported in box 7.  Settlement amounts are reported in box 14.

Need more information?
Contact Loggins Kern & McCombs for more information.

 

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