When Should You Issue a 1099

637

Business owners and self-employed professionals who pay other companies or individuals for their services are expected to issue an Internal Revenue Service Form 1099-MISC before the deadline of the tax filing season. This form is used to report miscellaneous income earnings, which have increased considerably in the last few years as the freelance and gig economy continues to grow in the United States.

In general, Form 1099-MISC is used by independent contractors to report their own income, but it is up to those who benefit from the work performed to issue the form and withhold taxes whenever requested by the recipient.

Since this is a form used to report miscellaneous income payments, it can also be used to report the amounts paid to financial advisors or investment brokers whose earnings are generated by means of commissions instead of dividends. Fishing boat owners or captains who work with seasonal crews are expected to issue 1099-MISC forms unless they maintain permanent staff on a payroll system that generates W-2 forms. Royalties paid for the use of intellectual property can be reported via 1099-MISC, and the same goes for extraordinary compensation made to employees beyond their regular duties; for example, an administrative assistant on payroll who agrees to work as a driver for his employer during some weekends can receive a 1099-MISC in lieu of overtime or bonus payments.

The threshold for issuing a 1099-MISC is $600 for entity. Let’s say a business retains an attorney to advise them on business registration matters, which results in $500 worth of legal fees; in this case, issuing the 1099-MISC is optional. The same goes for a cleaning service that visits a store five times a year and bills the company $100 each time. It is generally better to wait until the end of the year to issue 1099 forms for the purpose of consolidating all payments instead of issuing them after each service is performed; for example, all payments made to a drug screening facility for hiring purposes throughout the year can be reported on a single form.

There is a very important prerequisite that must be met prior to filing a 1099: a Form W-9, Request for Taxpayer Identification Number, must be given to all contractors who are not doing business as stock or capital corporations. In this form, the individuals or businesses performing services must provide their social security or tax ID numbers along with their address, the names of their registered businesses and their mailing addresses. It is important to pay attention to the backup withholding sections in IRS Form W-9 since the contractor will expect the business to properly withhold and remit to the IRS. A very small business that does not usually hire accountants or tax preparation professionals may ask their contractors to not request backup withholding on their W-90 forms, but not everyone may agree.

Finally, the IRS will assess penalties against those businesses that fail to issue 1099s: $30 for each form not filed by the end of February, and this amount may increase to $100 as the days past the issuing deadline accrue.