When you pay an individual or an LLC for labor services, rent or interest on a loan, you are required to submit a 1099 form to the IRS. For the tax reporting year of 2015, these forms are due to the individuals by Monday, February 1, 2016 and to the IRS (if you file electronically) by March 31, 2016. The IRS has been increasing the penalties for not submitting these forms. Just this year, for 2015 reporting, they doubled the penalty to $100 per form for not filing. As a business you are ‘helping’ the IRS by reporting this information, so that the IRS can match the monies paid against their personal tax returns making sure the individual is reporting the proper income and paying the appropriate tax.
What does this mean to you as a small business owner?
You do not need to report any payments you make via credit card, Paypal, and the like. If you were to report these payments, those individuals would receive a 1099-K from their merchant company for the same money that you would report to them on a 1099-MISC. It would incorrectly double the income reported to the IRS. You only report cash, checks, or wire transfers you pay directly from your bank.
In the tax profession there is debate about whether an LLC should be receiving a 1099-MISC as they are not required to be issued to corporations. However, with an LLC they can be organized as a corporation, but also as sole proprietorships or partnerships. So, I personally advise my clients, it is better to be safe and just issue the 1099 also to LLC’s.
So, who should be receiving a 1099 from your company?
- An individual or LLC that has been paid over $600 aggregate in the year for labor services in the form of cash, check or wire transfer from your bank account. A 1099-MISC should be filed and reported in Box 7 as non-employee compensation.
- An individual or LLC that has been paid over $600 aggregate in the year for rent on equipment or real estate in the form of cash, check or wire transfer from your bank account. A 1099-MISC should be file and reported in Box 1 as rent.
- An individual or LLC that you have paid over $10 for interest on a business loan in the form of cash, check or wire transfer from your bank account a 1099-INT should be filed.
There are other payments that should be reported on a 1099, but they are not as common for small business. The above three are the most common that I see in my tax practice, so please consult with your tax professional to verify in your particular situation if other forms should be filed.
In order to report this information to the IRS you will need the name, address, SSN or EIN (Employer Identification Number) from these individuals and LLC’s. The best practice is to have them fill out a W-9 the first time you pay them, just like you would require an employee to fill out a W-4 when you are hiring. Don’t wait until the end of the year as it can be difficult to find these individuals if you have not paid them in a while. I have found that individuals will fill out the W-9 if you hold their payment until you receive their W-9 form.
You can get the W-9 directly from the IRS website. https://www.irs.gov/pub/irs-pdf/fw9.pdf