There’s a new deadline for filing 1099-MISC for independent
contractors: this year’s 1099-MISC's that report non-employee compensation will
be due by January 31, 2017, bringing them in line with when W-2s are filed.
What is 1099-MISC and why do I care about it?
When a business hires an independent contractor and pays
them $600 or more, it is required by law to file a 1099-MISC reporting
non-employee compensation. This form is how the IRS knows that person has
income.
In general, businesses have been lackadaisical about filing
1099-MISC's, which creates an enforcement problem for the IRS. Without
1099-MISC, the IRS can’t easily tell if self-employed individuals are reporting
their income accurately.
With that in mind, the penalties for filing 1099-MISC late
or not filing at all are increasing.
What's the problem with filing 1099-MISC by January 31?
Due to poor planning or a poor understanding of the law,
businesses often neglect to have independent contractors fill out form W-9,
which is the form that provides the business all of the details they need to
file a 1099-MISC, such as the taxpayer identification number.
After contractors are paid, the business might lose touch
them, or they may be unresponsive or uncooperative about filling out a W-9.
Often, businesses don’t know they’re going to pay an
independent contractor more than $600 and don’t realize until the end of the
year when they’re reviewing their books for tax return purposes.
With one short month to get the 1099-MISC's filed, meeting
that deadline, businesses will need to be certain they are collecting W-9s in a
timely fashion.
To issue a 1099-MISC or not to issue a 1099-MISC, that is the question.
You don’t need to file a 1099-MISC if you’re not a business.
Self-employed individuals, business entities, and landlords
are all “businesses,” so contractors hired in the course of doing business need
a 1099-MISC. However, no 1099-MISC is needed if you hire an independent
contractor to perform a service to you as a private individual.
For example:
Sarah hires a contractor to make repairs on her personal
residence and pays him more than $600. NO 1099-MISC.
Sarah hires a contractor to make repairs to the offices of
Stonecreek Accounting, her business, and pays him more than $600. FILE
1099-MISC.
Sarah hires a contractor to make repairs in excess of $600 to
a rental property that she owns. FILE 1099-MISC.
You do not need to file a 1099-MISC if you pay by credit
card or PayPal.
When you use a third-party processor to make a payment, such
as a credit card or PayPal, you do not need to collect a W-9 or issue a
1099-MISC to the contractor.
Third-party processors file a different form, called a
1099-K, to report payments to the recipient. Any payment that is eligible to be
reported on a 1099-K is not eligible to be reported on a 1099-MISC.
If you did file a 1099-MISC in this situation, you run the
risk of double reporting that person’s income, which may now appear on both a
1099-MISC and a 1099-K.
If you pay by cash, check, wire transfer, ACH, or direct
deposit, then you file a 1099-MISC.
If you pay by credit card, debit card, PayPal, or via some
other processor, then you don’t file a 1099-MISC, because those payments are
reported on a 1099-K by the third party processor.
You do not need to file a 1099-MISC if the independent
contractor is something other than a self-employed individual.
The hitch here is that single-owner LLCs often count as self-employed
individuals, but you don’t know if the LLC needs a 1099-MISC without asking. An
LLC could be a partnership, an S-Corp, or a C-Corp, none of which need a
1099-MISC.
Don’t assume. Ask for a W-9 from every individual contractor
and every LLC. The independent contractor will check the appropriate boxes on
the W-9 to help you ascertain whether or not you need to file a 1099-MISC.
Who counts as an independent contractor?
We won’t go into the finer points of differentiating
independent contractors from employees, but an independent contractor is
essentially any person that you pay for services who is not your employee.
Examples may include:
An accountant or attorney
Someone hired to work on a single, short-term
project
A consultant
A worker with specialized skills needed
temporarily
A repair person
Example:
A landscaper does not have an irrigation specialist on staff,
so she hires an irrigation company that’s an LLC to install an irrigation
system for a project she’s doing. She’s not sure if she’ll end up paying this
irrigation company more than $600. She should ask the irrigation company to
fill out a W-9, because she may need to issue a 1099-MISC.
Example:
A business normally pays its accountant $500 to complete its
tax return, but this year asked the accountant to provide some additional
consultation and paid her a total of $1,000 this year. The business should ask
the accountant to fill out a W-9, because it may need to issue a 1099-MISC.
With the January 31 deadline in mind, now is the time to look back on your year and start trying to collect any W-9's that you've missed, and put a policy in place going forward to ensure you have all of the information you need to file your 1099's at the end of the year.
