The main reason a 1099 typically gets filed is to report to the government that you paid some person or entity and are planning on reporting it as an expense so the form is issued to put the payee on notice that they need to report that payment as income.
Who needs to file and receive a 1099?
Any trade or business entity, government or nonprofit agency may need to file 1099 forms. Generally, they are issued for payments of over $600 during the year to non-corporate entities. The main types of business payments reported on a 1099 are for services, rents, prizes, awards and interest. Business payments for goods are exempt from reporting. 1099’s are due to the recipient by January 31st each year and due to the IRS along with summary Form 1096 by February 28th. Franchisees should be preparing 1099’s for contractors who are not classified as employees but perform services for the business. 1099’s should also be filed for store lease payments unless the owner of the real estate is a C Corporation. Most real estate is owned by LLC’s and partnerships so it pays to check with your landlord to see if filing is required.
What information do organizations need to file? –The most important form every business should have for all non-corporate vendors they make these payments to is a Form W-9. This form collects information organizations use to determine if they should be issued a 1099.
What if the vendor will not supply a Form W-9?
If you don’t have a W-9 on file, backup withholding of 28 percent should be taken out of the payment and remitted through the same deposit rules of Circular E. Then, a Form 945 annual return needs to be filed at the end of the year. Typically if you make it policy to not issue a vendor payment unless you have the W-9 on file, this will never be an issue.
What are the penalties for not filing or filing late? Filing penalties may be charged for late filing, not providing all required information, or failing to correct information as requested. Filing penalties range from $50 to $500 per 1099. The penalties with the most potential for damage are for organizations that don’t issue a 1099 or misclassify a payee that could result in back taxes, penalties and interest.
What are the best practices for 1099 compliance?
There are three key steps that organizations can take to prevent issues:
- Get a form W-9 for every company that doesn’t have “Inc.” or “Corp.” in its name and do not make a payment until the W-9 is received.
- Make sure that payee shouldn’t be considered an employee. Refer to Publication 1779 for guidance or consult your CPA or attorney if you are unsure.
- File all forms timely.
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