Businesses of all sizes will be sending and receiving a flurry of 1099 forms in the next week. If you haven’t already done so, it’s time to get your 1099 forms in the mail. The IRS requirement is that all 1099 forms be sent to the recipients no later than February 2, 2015. You will then need to file the forms with the IRS by March 2, 2015.
The 1099 form most often sent by small businesses is the 1099-MISC. This form is used to report payments that you make in the course of your trade or business to other parties. According to the IRS rules and regulations, that includes pretty much any payment in any amount that your business makes to anyone (person or other business). There are, of course, a few exceptions. You do not have to report payments of less than $600 in total that you made to any person or business during the year. Also, you do not have to send a 1099 to any business that is incorporated – C Corporation or S Corporation (but there are exceptions to that as well).
Which Box to Use
When preparing to print 1099s using accounting software, make sure that your accounts are linked or “mapped” to the correct box on the 1099 form. Following are some tips on where to map your accounts:
- Most all payments your business makes will be reported in Box 7, Nonemployee compensation.
- Rent you pay will be reported in Box 1, Rents. This includes rent for your building or office space and also for machine rentals; such as renting a bulldozer or truck. If the rental contract includes the machine and an operator, you’ll need to divide the contract amount between the rental of the machine (which goes in Box 1) and the cost of the operator (which would go in Box 7). Check the contract to see if it separates these two expenses. If not, you can choose a suitable proration like 50/50 or 60/40 and report the amounts in separate boxes.
- If your business is a franchise and you make royalty payments, these payments will be reported in Box 2, Royalties. Or if by chance your business makes royalty payments for the use of patents, copyrights or trade names, those amounts will go in Box 2 as well.
- Payments to attorneys and law firms are reported in Box 7, Nonemployee compensation. You are required to report payments to attorneys and law firms even if the person or entity is a corporation. Box 14, Gross proceeds paid to an attorney, is used when the payment is made as a result of a settlement or similar agreement. This type of payment usually encompasses not only the payment of legal fees but also payment to a claimant.
- Box 6, Medical and health care payments, is NOT for reporting health insurance premiums your business pays to an insurance company. This box is used to report payments made for actual health care services like a doctor’s or hospital visit.
How to Report the Recipient’s Information
The IRS is kind of fussy about how they want the recipient’s information to be reported on the 1099 form. If the recipient is a sole proprietor, make sure that the person’s full name appears on the first line in the Recipient’s Name box. You can then include their business name in the same box on the second line. Do not enter only the business name. If the recipient is a single-member LLC, enter only the member’s name on the first line and the LLCs name on the second line. Be sure to include the LLCs name. If the recipient is a corporation, enter only the corporation’s name in this space.
Having the recipient’s correct TIN or taxpayer identification number is also very important. If the TIN you report on the 1099 form does not match what the IRS has in its records, you will receive a notice requesting that you confirm the information with the recipient. If it happens two years in a row, you may be required to withhold federal income tax from future payments to the recipient. Also, be sure to have the TIN entered in the correct format. Social security numbers should be in the XXX-XX-XXX format and employer identification numbers in the XX-XXXXXXX format.
A sole proprietor may use just his social security number (SSN) or he may have an employer identification number (EIN). You can enter either number on the 1099 but the IRS prefers that you enter the SSN. For a single-member LLC, you can enter either the SSN or the EIN. If the LLC is taxed as a corporation, partnership or other, enter the business’ EIN not an SSN.
You can obtain the information you need to complete the 1099 by having the recipient complete an IRS Form W-9. The form is available for download or printing from the IRS website. Make it a habit to send a W-9 form to each new vendor prior to doing business with them so that you can get their correct tax information in advance. Waiting until the last minute before filing to get missing numbers can be stressful.
However, if you don’t receive a TIN from a recipient in a timely fashion, leave the box blank and send it out anyway. Better to get it out by the due date and follow up prior to filing the forms with the IRS than face a penalty for not filing timely.
File The Forms With The IRS
After you’ve printed and mailed out the appropriate copies of the form to each recipient (generally Copy B and Copy 2), be sure to file Copy A with the IRS. You will need to use IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns, as a cover page for the 1099s. The address for where to send the forms is on the 1096 form but there are only two; Austin, Texas and Kansas City, Missouri.
After reading all of this and you’re still a bit unsure, remember, “When in doubt, send it out.” You’re better off sending a 1099 to a recipient even if it isn’t necessary than not sending one when it is. The fines and penalties for not sending 1099s are rather steep.