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What You Need to Know About 1099s Come Tax Time

by
Sonu Shukla
on
9/25/2016
What You Need to Know About 1099s Come Tax Time

If you're a business owner and if you've contracted people to perform temporary or freelance work for your company, then there's a good chance you'll need to issue a 1099 to these freelancers/independent contractors as part of your legal tax obligations. Unfortunately, 1099s can be quite confusing—especially if you've never had to deal with them before.

What's a 1099?

A 1099 is a tax-reporting form used to document earnings paid to independent contractors and freelancers. For each 1099 you issue to an independent contractor, you must also keep a copy for your own filing records, in addition to sending one to the IRS. Because funds paid to independent contractors typically aren't subjected to Federal and state taxes, compensation listed on a 1099 will likely be subjected to self-employment, Federal, state, and other taxes upon filing.

Who Needs to Be Issued a 1099?

So, how do you know who should be issued a 1099 and who doesn't need one? As a general rule, anybody you hire to do work for your company without putting them on your long-term payroll is considered an independent contractor. There is no tax withholding on these payments. Furthermore, you should be aware that a 1099 form is only required for each person to whom you paid at least $600 during the tax year.

For example, if you hired a freelance writer to publish a few blogs on your website and you paid him/her $100 for the entire project, you don't need to issue a 1099 (though you must still report these expenses). On the other hand, if you paid a freelance web designer to redo your company's website at a cost of $2,000, then you'd better make sure he or she receives a 1099.

Specifically, 1099s are required to be sent out by no later than January 31 of the applicable tax year. Having an accountant to assist you with the filling out and issuing of 1099s is a great way to save yourself the time and stress of trying to handle it on your own. 

What Could Happen if I Fail to Issue a 1099? 

Failing to issue a 1099 to the right people could put you in trouble with the IRS. Fines themselves can vary greatly depending on how many forms you're missing and how long it takes you to get them sent out. However, the maximum penalty for not issuing 1099s is $1.5 million per tax year, so this isn't something you want to take lightly. Individual form penalties usually range from about $30 to $100.

Our Advice: Have Workers Fill Out W-9s 

Keep in mind that in order to fill out and issue a 1099, you will need some information about the person you've been making payments to. Specifically, you'll need their name, mailing address, and tax ID number or social security number in order to complete a 1099 form and send it to your recipient. The best way to collect this information is to have all independent contractors and/or freelancers working for your company fill out a W-9 before you begin working with them. This form collects all of that information, which can save you a lot of time and hassle come tax time.

As you can see, there's a lot to learn about 1099s, especially when you're a new business owner. If you're confused by anything related to 1099s, you may want to consider speaking with an accountant. Having a small business accountant can save you the stress and hassle of trying to complete and issue 1099 forms each year.

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

SONU SHUKLA, CPA, P.A.
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Florida

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