The self-employed version of the W-2 is the 1099.
If you’ve subcontracted work to someone else who is not your employee and paid them more than $600 in 2009, then you have send them – as well as the Internal Revenue Service – a Form 1099 MISC.
Who gets a 1099? Tax expert and enrolled agent, Eva Rosenberg of TaxMama.com, says just about anybody who has done work for your business should get a 1099, including the electrician who rewired your office, the attorney who handled your incorporation and the doctor who examined your injured employee.
What info do you need to file a 1099? Rosenberg advises that the IRS is getting tougher on this issue and that it’s likely that next year, it will require 1099s for subcontractors who made even less than $600, so start the on the right foot in 2010 by collecting W-9s, request for taxpayer information, from everyone who does work for your company.
If you neglected to request W-9s in 2009, you’ll still need the same information from each worker, so if you haven’t collected it previously, now’s the time. Make sure you have each vendor’s name, name under which he does business (DBA), mailing address, phone number and tax identification or Social Security number.
Make the deadline or pay the penalty. The deadline for providing recipients with 1099s is Feb. 1, 2010. The deadline for filing the information with the IRS is March 1, 2010. If you file electronically, the due date is extended to March 31, 2010.
Otherwise, expect to cough up:
- $15 per 1099 if you correctly file within 30 days after the deadline; maximum penalty $25,000 for small businesses.
- $30 per 1099 if you correctly file more than 30 days after the due date but by Aug. 1; maximum penalty $50,000 for small businesses.
- $50 per 1099 if you file after Aug. 1 or you don’t file the required information; maximum penalty $100,000 for small businesses.
Paper is still required. The IRS doesn’t make filing 1099s easy. You must send recipients and the government official paper copies of the 1099 form. You can order the multi-part forms from the IRS, buy them from an office supply store or turn the whole business over to your accountant or use an online e-filing service. Here are some the IRS lists
Every dollar counts. Enter total payments in Box 7. While you may have some vendors who complain, you're not required to separate expenses from fees for service. That's their problem.
What remains is complicated. Chances are if any of the issues below is the case, you should turn the whole mess over to your accountant:
- Complete the “Account number” box if you have more than one account for a contractor and are filing more than one 1099-MISC for that vendor.
- Check the “2nd TIN not” box if the IRS has notified you twice in three calendar years that the contractor has provided an incorrect Taxpayer Identification Number (TIN).
- Complete Box 4 “Federal Income Tax” withheld if the contractor didn’t provide you with his TIN and you have withheld backup withholding from the contractor payments as required by the IRS.
Otherwise, the whole process is pretty simple. If you only have a few vendors, it’s easy to do it yourself, particularly if you use an online e-filing service. The charge is about $5 per 1099 and worth every penny.
If you are on the receiving end of a 1099
Pay attention. Remember the government is getting a copy of this too. Compare the total to what you think you were paid. If there is a discrepancy, assume the government will notice. If the 1099 is wildly wrong - you made $6,400 and the company sent you a 1099 for $64,000 - notify the issuer and insist that they send you and the IRS a corrected version. Keep all supporting documentation.
If it is a little wrong – it includes payments you don’t consider income, for instance – remember, when you file, you can subtract all the expenses related to doing the job. When you do that, discrepancies will even out in the end.
How to declare end-of-the-year income. When a customer sends a 1099 at the end of the year, it usually will reflect payments right up to Dec. 31, but you probably won’t receive that money until January. Enrolled Agent Joseph Anthony of Portland, Ore., says you can legally handle this two ways.
You can report the income and then subtract it out as an expense adjustment on Part 5 of Schedule C, "Adjustments for income received in 2009." But be sure to actually report the income next year, Anthony warns; otherwise, you're begging for trouble.
A better option, he says, is to ignore the discrepancy, include it as 2009 income, and pay taxes on it when you turn in your income tax form in 2010.
"All other things being equal, including your income and circumstances, you might as well pay the tax in the year the 1099 says it's owed," Anthony advises. "It cuts down on the possibility that you'll be questioned."
What if you don’t get a 1099? Don’t get your hopes up. It’s not free money. If you earned it, report it. Then take every penny of the deductions to which you are entitled. “You're probably going to come out ahead in the end, and you are for sure going to sleep better," Anthony says.