Tax season is coming soon. Why not get a head start?
A vendor providing goods or services to your company that is not incorporated may require additional tax forms for the IRS called the W-9 and 1099. Generally, this occurs when hiring independent contractors to whom your business has paid over $600 to during the tax year. Failing to file these forms may lead to large penalties or a backup withholdings of 28% of reportable payments. It is important to understand and file the correct forms in order to avoid these penalties as the IRS is aggressively enforcing these rules.
W-9 is the IRS’ “Request for Taxpayer Identification Number and Certification”. It identifies the entity’s name, address, type of entity, and taxpayer identification number. This is either the employer identification number (company) or social security number (individual). All vendors should complete a W-9 form if over the $600 threshold. Payments to corporations as vendors generally do not require a W-9 form with the exception of attorneys and law firms.
There are many various 1099 forms for different types of payments, however the most common one for a small business is the 1099-MISC which covers independent contractors being paid by cash or check. Additionally, Form 1096 needs to be completed which shows the total of all forms being submitted.
The following are things to consider whether or not a 1099-MISC form needs to be filed:
- Did the contract employee get at least $600 of payments over the fiscal year?
- Did you receive $10 or more for royalties, substitute dividends, and tax exempt interest?
- Did you make direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail location?
If the answer is yes to any of these questions, then a 1099-MISC form is required.
Companies that process debit and credit cards may need to file a 1099-K form. Other third party services such as PayPal also apply. This form includes merchant information and the gross amount of processed transactions. Form 1099-K does not apply to small businesses whose payment transactions are lower than $20,000 and have fewer than 200 transactions.
Due Dates and Penalties
1099 forms are due to each recipient by January 31st and to the IRS (form 1096) by February 28th. Here are the following penalties for filing late with a small business being defined as making less than $5 million in average annual gross receipts for the last 3 tax years:
- Within 30 days after the filing date the penalty is $30 per 1099, with an annual maximum of $250,000 ($75,000 for small businesses).
- Between April 1 and August 1 of the calendar year in which the 1099 was due, the penalty is $60 per 1099, with an annual maximum amount of $500,000 ($200,000 for small businesses).
- For corrections after August 1, the penalty is $100 per 1099, with an annual maximum amount of $1,500,000 ($500,000 for small businesses).
If form W-9 is not filed or a taxpayer identification number was not provided or was incorrect then backup withholdings may be required. Under these conditions, payers must withhold federal income tax from those payments at the federal backup withholding rate, which is currently 28%. Once a correct name and taxpayer identification number is received then backup withholdings may stop.
Please don’t hesitate to call or email us questions. Our phone number is 770-478-7424 and you can email us at firstname.lastname@example.org. Here are links to forms W-9 and 1099-MISC and their instructions for your convenience.