You must track payments you make to all businesses and individuals that you buy services from. If you pay independent contractors, you may have to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business. If the following four conditions are met, you must generally report a payment as non-employee compensation.
- You made the payment to someone who is not your employee;
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
- You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
- You made payments to the payee of at least $600 during the year.
Does everyone have to do this? No. Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which a Form 1099-MISC is not required include:
- Generally, payments to a corporation;
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items;
- Payments of rent to real estate agents, but see Regulations section 1.6041-1(e)(5), Example 5;
- Wages paid to employees (report on Form W-2, Wage and Tax Statement);
- Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (report on Form W-2);
- Business travel allowances paid to employees (may be reportable on Form W-2);
- Cost of current life insurance protection (report on Form W-2 or Form 1099-R,);
- Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government;
So, what information do I need to get? Normally when you are going to send someone a 1099-MISC, you first ask them to fill out an IRS Form W-9. It’s a simple, 1-page form that asks for:
- Business and/or Individual’s Name and Address
- Business and/or Individual’s status (i.e, corporation, LLC, sole proprietor, etc.)
- Social Security Number (for sole proprietorships and individuals)
- Tax ID Number (for applicable business entities)
Where can I find a W-9 form? You can get one from the IRS’s website at www.irs.gov/pub/irs-pdf/fw9.pdf.
On a W-9 form, the Social Security Number and Tax ID Number are the keys. Without these, the IRS can’t properly match up the 1099-MISC forms that you report with the tax returns that are filed by the people and businesses you gave them to. If you don’t prepare and file 1099-MISCs, or if your data is wrong, it will be on you to fix it or face fines and penalties unless you can show that you properly reported what you were given.
What are the penalties? For unreported or incorrect 1099-MISC’s, the following penalties will be in effect for the year 2015 and are applied per 1099:
- $30 penalty for filing a 1099 not more than 30 days late;
- $60 penalty for filing a 1099 more than 30 days late and before August 1;
- $100 penalty for filing a 1099 on or after August 1;
- $250 penalty for intentional failure to file.
Does this apply to personal expenses as well as business expenses? No. The requirement to collect Form W-9s and send out 1099-MISCs is limited to those individuals and businesses which pay expenses that are connected to their business.
Does this apply to goods I buy (hardware, appliances, etc.) as well as services? No. But understand that information reporting at the source is a major issue and may become more inclusive in the future by expanding the definition of who gets a 1099.
Who should I send W-9 forms to? All service providers connected to your business that you anticipate paying more than $600. Our advice is to simply get the tax data you might need from everyone even if a 1099-MISC is not required.
When is the best time to ask someone for a W-9? Before you pay them. The best time is now, or as soon as you make your first purchase of services from someone. The later you leave it, the more difficult it can be. You may hire a contractor for a one-time job in April, only to find that company is no more, or the individual has moved, when you try to send a W-9. Get a completed W-9 prior to issuing your check!
What if a company or a person won’t give me a W-9? This is a tough decision. If you don’t have a Social Security Number or Tax ID number, you will be the one paying for it in the end. If someone won’t fill out a W-9, you maybe need to rethink doing business with them. Or, maybe you can make payment of their bill contingent upon receiving a signed Form W-9.
What if someone gives me incorrect information? Your best defense is a signed W-9, showing that you correctly reported the information you were given. That puts the onus back on the individual or business who gave you the W-9 in the first place.
What happens if I pay a service provider and I don’t obtain correct W-9 information in order to produce a 1099? You may be subject to the Backup Withholding rules.
What is Backup Withholding? Payers must file information return Form 1099 with the IRS. For 1099 recipients, the information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). These payments generally are not subject to withholding. However, “backup” withholding is required in certain situations.
Payments subject to backup withholding: Backup withholding can apply to most kinds of payments that are reported on Form 1099. These include:
- Interest payments
- Patronage dividends, but only if at least half of the payment is in money
- Rents, profits, or other gains
- Commissions, fees, or other payments for work you do as an independent contractor
- Royalty payments, and
- Certain other payments.
What are the backup withholding rules? Before a recipient begins to receive payments which will be reported on Form 1099, Form W-9 must be completed accurately. The recipient also must certify (under penalties of perjury) that their TIN is correct and that they are not subject to backup withholding. The payer must withhold federal income tax at a flat of 28% rate in the following situations:
- The recipient does not give the payer their TIN in the required manner
- The IRS notifies the payer that the TIN you gave is incorrect
- You are required, but fail, to certify that you are not subject to backup withholding
- The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 210-day period.
What do I do with any backup withholding monies I have had to withhold as described above?Backup withholding is deposited like other federal taxes and is accounted for by reporting the tax on Form 945.
Is there a problem if I don’t have this information and I don’t produce Form 1099? Yes there is. IRS could disallow deductions taken if 1099’s have not been produced where required to. Monetary penalties for non-compliance may be asserted and are discussed under IRC §6672.
So what is the final word on all of this? As a good business practice, get W-9 information from everyone your business receives services from. If you don’t and you are examined you may lose all deductions associated with vendors who you should have issued a 1099 to but did not.
If vendor W-9’s are completed accurately you will not be subject to backup withholding. If you are subject to backup withholding you’ll need to begin preparing Form 945. If you are required to file Form 945 and you don’t you will be subject to failure to file and failure to pay penalties.