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Mastering your 1099
What Business Owners Need to Know Regarding Annual 1099 Filing Requirements
If you own a business and work with contractors or lease a space, then you’ll want to know how to file 1099s. In this article, I’ll show you how and why it is so important. Now, let’s get organized!
I’m Dennis Fry with CPAs for Hire, and we believe that you need to know your numbers to know your business.
So, let’s talk about 1099s:
So, What is a 1099 and why do we care?
- If your business paid more than $600 during the calendar year for rent, business services, or independent contractors, you may be required to issue them a 1099 to report those payments to the IRS
- This puts those payments on record for the IRS to cross check the income reporting by the recipient
How do we determine who gets one?To start, print a vendor summary report for the year from your accounting software, and sort it in descending order by total amount paid
- Looking at the list, put an “X” next to amounts less than $600
- Of the remaining, determine the vendors that you paid for inventory, materials or supplies
- For these, put an “X” next to their name, as they generally do not get one
- Of these remaining, determine if any have “, Inc.” after their name
- Put an “X” next to these, as Corporations generally do not get one,
- With one exception, Attorneys services… Attorney’s always get one
- Of these remaining, this is your list of contractors that potentially need a 1099
- Now get a detailed list of payments made to each and only add those paid by cash or check (don’t count any payments by debit or credit card… we’ll discuss why in a moment)
- If the total is still $600 or more, you need to request a completed and signed Form W-9 for the tax year being reported
What is a Form W-9?
- This is the form your landlords and independent contractors are supposed to provide you so that you know how they report their income taxes, which is how you determine if your business needs to provide them a 1099
Based on the how the W-9 is completed, look to Section #3, and if,
- The 1st box is checked for Individual/sole proprietor or single-member LLC, or
- The 4th box is checked for Partnership, or
- The 5th box is checked – Limited Liability Company w/ the letter “P” for Partnership, then send them a 1099
- The 2nd box is checked for C Corporation, or
- The 3rd box is checked for S Corporation, or
- The 5th box is checked for Limited Liability Company w/ the letters “C” or “S” added, then you DON’T send them a 1099
Now that we know who gets one, there are 2 important forms you need to know about
- Form 1099-MISC – Although this form has many options, the most used by businesses will be Box 1, to report rent paid to your landlord, and
- Form 1099-NEC – which is the new form that replaced Box 7 of Form 1099-MISC for “non-employee compensation” in 2020… This is where to report annual payments to independent contractors and other business services, such as a cleaning service
Now, let’s talk about another 1099 form… 1099-K, who files it, and why it’s important to know
- So earlier we talked about payments made by debit or credits cards
- If you pay any of your contractors in this way, then your contractor uses a merchant service to process it, e.g., PayPal, Square, or Stripe
- Merchant services are required to send its customers a 1099-K form, if
- Gross payments exceed $20,000, AND
- There are more than 200 transactions
- The reason this matters to you, is that the filing requirement for these payments is now the responsibility of the merchant service
So now you’re probably asking, How do I get these submitted to the contractors and the IRS?
- If you’re already working with a CPA, we recommend they do the preparation and e-filing if they offer it as a service
- And if not, we can help you out… Just go to cpasforhire.com/1099 to get started
If you are looking for a CPA, we work with clients all over the country.