1099 MISC is an informational form that records an exchange of money between you and a vendor as a business expense for you, and income for the vendor. You should submit a 1099 to the IRS for each entitled vendor you have worked with, on a yearly basis, and send a copy to the vendor.
Who is entitled to receive a 1099MISC form?
The IRS requires that any non-incorporated vendor of yours receives a 1099 form from you if you pay them more than $600 over the whole year. If the vendor is a corporation, either S or C corp, they are exempt from this requirement, as their business model already requires them to record every payment as income. Most LLCs are NOT exempt. Additionally, vendors who sell products or physical goods are also exempt from receiving a 1099. Examples of eligible 1099 recipients are: your accountant, photographer, social media expert, lawyer, or the person who cleans your office.
How do I generate a 1099 and what is W9?
First off, understand that there is a symbiosis between the 1099MISC and the W9. These two forms work together to keep the IRS informed of the exchange of money between the owner and a non-incorporated service provider.
The purpose of a W9/1099 form exchange is pretty straightforward. When you engage with an individual or LLC to do a service for you, ask them to fill out a W9 form for you, detailing their name, address, SSN, and signature. You will retain that form throughout the year, and, if you have paid them $600.00 or more throughout the year, you must issue them a 1099 in January so they can file the payment on their own taxes.
Okay, great. What about if I use my credit card, debit card, or online payment to purchase services? Do I still have to track that and file a 1099?
No. Debit and credit card payments, as well as online cash transfers and ACH payments are reported by the banks that make the transfers. This means that the vendors that you paid via these methods will receive their own 1099-K from their banks, requiring them to report the deposits as income. Bottom line: Payments made to vendors via credit or debit cards, as well as ACH, are exempt from 1099 reporting requirements.
What happens if I don’t file a 1099 for someone I paid over $600 to?
If you pay a vendor more than $600.00 over the course of the year, and DO NOT collect a W9/submit a 1099, the IRS can disallow the expense in an audit, meaning that you now are paying federal income tax on that additional amount. The IRS will also fine you for adding new income to the equation, as well as fine you for every missing 1099. This can become very costly very quickly.
How do I avoid the paperwork and time required to prepare the forms?
There are online services offering assistance in collecting W9, as well as preparing your 1099s. BalanceMonkey will also take care of that as part of managing your bookkeeping and business tax compliance.