According to the IRS you must file a 1099-MISC “for each person in the course of your business to whom you have paid during the year . . . at least $600 in . . .services performed by someone who is not your employee.” This does not apply to employees.
There is also an exception for payments made to s or c corporations and LLCs that have elected to be taxed as s corporations. Naturally, there are exceptions to this exception. Lawyers must get a 1099 even if they have corporations. There are a couple of other very rare exceptions, which you can find here.
You are also not required to issue a 1099 if you paid the service provider by credit card, paypal, or other “third-party network providers.” Note that credit cards do not mean debit cards. Payments made by debit card are not exempt from 1099 rules as the payment comes straight from your bank and not through a third party.
Wondering why credit card payments are excluded? Under the tax law, credit card companies are, in particular circumstances, required to issue a Form 1099-K which takes the place of the 1099-MISC.
1) The person was a non-employee
2) The person worked on behalf of your business
3) You paid that person $600 or more in total during the tax year
4) You paid that person via cash, check, or debit card (or in some other many that took the money straight from your bank account)
Each of these should be relatively straight forward, but number 2 can trip up some. Someone is working on behalf of your business if they’re either, and this is my lingo, working on or in your business. Working in your business would be like doing work for your clients or on your internal operations. Working on your business would be doing work unrelated to what you do for your clients. An example would be hiring a web designer to do your site. If a graphic designer hired a fellow designer to help with client work that’d person would be working in the biz. If the designer hired a photographer to do a brand shoot, the photog would be working on the business. In a legal sense, we would call that photographer an independent contract. However, for tax purposes, both the workers in this example would need 1099s.
1) Send the service provider this link to the IRS Form W-9, and ask them to return it in time for you to file the 1099 by the end of January. If they question why they need to do it, feel free to direct them to this blog. Also, feel free to let the person know that they can get an EIN, for free, and within 5 minutes, by using this IRS online application. The EIN allows them to omit putting their social security number on the W-9.
2) Use an online service to electronically complete and submit 1099s. I’m liking this one.
3) Create an account and put in all of your company info. Make sure you input the tax year when/where it asks, not the current year. If you’re issuing the 1099 in January 2019, you are doing it for the 2018 tax year.
4) Once you get to the main menu, you will see your company name under “filing company.” It should be green. Click on that. Then, you can click “add payee” to begin completing the 1099s.
5) Input all of the person’s info that you got from the W-9. Then put the amount you paid that individual on line 7 “non-employee compensation.”
6) Complete all your 1099s and then “checkout” to get your 1099s filed with the IRS. You will then need to send the 1099s to the service providers by end of day January 31st.
It is the payor’s responsibility to issue 1099s, so if you’re expecting them but not getting them, don’t sweat it. If you need to send out multiple W9s to those who owe you 1099s you can make your life easier by filling out the W9 and sharing it via Dropbox or Google Drive with whomever needs it.
That about covers it on the 1099 front. It doesn’t need to be all that difficult, but this is a lot of misinformation about 1099s. Once you tackle your 1099s, you can focus on getting your 2018 books up to date. Check out this blog for more info on that. I’d also love to see you at a tax party if you want to save some money on a tax pro but want a little bit of guidance and camaraderie tackling your return.