Hey all, hope you’re staying warm out there. With the January 31st issue deadline right around the corner, let’s have a quick talk about 1099’s.
First, what is a 1099?
A 1099 is a statement of income issued to a taxpayer and then filed with the IRS. This form tells the IRS that a business or self-employed individual paid someone for something, but that person was not an employee of the company.
A 1099 is a tax form you send someone you paid, specifically for services they provided to you..
You can download a 1099 from the IRS website here,. If you paid someone more than $600, you need to send them a 1099. It tells the government that you paid this person so you can write that amount off on your taxes. It also tells the government that this person was paid this amount by you and they need to mark it as income.
These forms are not sent to companies you pay, just individuals. Like, if you bought $800 worth of gear from Guitar Center, you don’t need to send Guitar Center a 1099.
There are a bunch of different kinds of 1099’s. 1099’s are used to report interest earned on savings accounts, retirement distributions, cancellation of debt, and more. In this case, we are going to focus on the 1099-NEC, which reports non-employee compensation, and the 1099-M, which reports royalties.
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Do I Need To Send Out 1099s?
Now that we know what a 1099 is, let’s discuss why you might get one or need to issue one.
If you’re self-employed and you earned money, you have to report it to the IRS. Yes, even if you only made a few hundred bucks from ASCAP! If you’re a business owner (like, you have an LLC or S Corp) and you hired people to help you, you get to deduct the cost of those people, which lowers your taxable income.
An example of this is a band who hired a graphic designer to create some art work for a new release. The band (business) paid the contractor (designer) $1,000 for their services. Per IRS, any contractor who earned more than $600 each year must receive a 1099 from the company that paid them. In this case, the band would ask the contractor to fill out a form called the W9 and the band would use the information on that form to issue the contractor a 1099 for $1,000.
By issuing the 1099, the band is formally declaring that they hired the designer, they incurred a business expense, and they’ll be writing off – or deducting – $1,000 from their annual income. The 1099 acts as a sort of checks-and-balances – the contractor should confirm that the 1099 is correct, because the IRS will later cross reference whether or not the designer actually claimed the $1,000 as income.
This is an area of the tax return that the IRS likes to check up on.
One of the parts of the tax return that gets a lot of attention from the IRS is how much you say you paid people. Imagine paying someone $10,000 each year without issuing them a 1099, then attempting to reduce your taxable income by $10,000 without a form to verify where that money went. It opens questions of tax evasion, money laundering, and fraud, and it can get the IRS on your tail super fast if you’re not careful.
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If you are a business owner, and you paid anyone more than $600 last year, you must send them a 1099.
Some frequently asked questions about this are:
Q: How do I get my contractors information?
A: You send them a PDF of form W9 with a request for information. You can find one here to send.
Q: If I issue my friend a 1099, do they have to pay tax on that?
A: Short answer, yes, but whether or not they actually have to pay tax depends on their tax situation. As a business owner, you must first think about protecting your business from audit.
Q: When is the due date to send my contractors 1099s?
A: January 31st
Q: Do I have to issue 1099’s to big corporations, like my car insurance?
A: No, you only need to issue 1099’s to individual people (called “independent contractors”) who are generally self-employed.
Q: I was supposed to get a 1099 from someone who paid me and I didn’t – do I still need to claim the income?
A: YES. You need to claim ALL income, whether it was documented with the IRS or not.
Q: How do I file a 1099?
A: If you use bookkeeping software like QuickBooks, Freshbooks, or Wave, it’s llikely that you can submit your 1099’s directly through it. There are DIY programs specifically for this, such as track1099.com, or a local tax pro can help you.
