For many individual taxpayers and small business owners, using independent contractors can mean a reduction in tax liability for funds paid out, but can also mean that you are not responsible for tax liabilities that would be incurred for an employee. So who should receive a 1099 and how do you issue them? Working with your tax professional or accountant, such as Tax Alternative Group, LLC in Poughkeepsie, NY, you can determine if you need to issue any 1099 forms and who should receive them.
Defining an Independent Contractor
The first thing you need to do is to determine if the individuals meet the definition of an independent contractor. This is a company or individual that your business contracted with to do some specific tasks, projects or for consulting. They typically provide a specific level of expertise only when you needed it, and perhaps even infrequently. Additionally, they did provide their own equipment and did not work under a specifically defined schedule. You also did not provide them with any training.
If you did not issue a paycheck to them on a regular basis, did not withhold any taxes or provide them with any additional benefits. Therefore, the contractor had set up their own shop and also assumed the responsibility for handling their own taxes and other government dealings. The most important thing to remember is that if you direct how, when or where they do their work, you may be crossing the line into employer and employee, instead of an independent contractor.
Consultants could be in marketing, human resources and management. There are also independent contractors available for services from attorneys, accountants and bookkeeping services. You may also use them to handle maintenance repairs, janitorial services and even computer programmers.
Getting Your 1099s
In order to get 1099s, you will need to order them with a special machine readable magnetic media. Therefore, you will need to order them in advance prior to sending them out on January. You are also on a deadline to have mailed them to your independent contractors by the end of January after the tax year ends.
The IRS does not make them available in a downloadable form from their website and you cannot find them in the post office with the other tax forms. Working with your CPA, you can find a source to order the acceptable forms based on the number of independent contractors that you have working for you and providing services.
To determine the number of forms that you will need, you should review your payment records for the past year and see how many qualifying contractors that you have and then get several extras in case you make any errors in the printing process. Also, order W-9s that you can send to your contractors to get their information on an official IRS form.
Complete the form with your business name and tax ID number, as well as your contractor’s name and tax ID number. If you paid over $600 to a contractor, then you need to send them the 1099 with the amount you paid filled out in the form. Read over all the instructions and determine if there are any other boxes that you might need to complete on the form.
Points to Keep in Mind
The IRS will consider that you did not complete the 1099s correctly if you send them out late, meaning they were sent out after the end of January. Additionally, if you do not use the right paper, then you may receive a penalty as a result. It is also important to keep your information accurate on the forms. Make sure that you list the individual and their company’s name on the 1099. This will give the IRS enough information to properly match the 1099 with the right taxpayer.
Do not round off the figure to the nearest dollar. The IRS wants to see the amount earned down to the penny. If you do make any of these mistakes, the IRS can fine you $50 per form that was not filled out correctly or mailed in a timely fashion. However, if you do make a mistake and catch it early enough, you may be able to correct it and the IRS will more than likely pardon you from penalties.
Working with your tax professional, you need to be sure that you classify your contractors correctly, as you can incur a penalty and employment taxes for the individual.
Patrick O'Hara, EA