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IRS Tax Form 1099 Reporting is Mandatory for Your Online Business

Couple months back I wrote about paying self employment taxes if you are making money from a full or part time gig outside your employment.

Another important point of discussion is filing IRS tax form 1099 reporting for services you paid for during the tax year.

If you paid anyone at least $600 during the tax year for services rendered to your business, you are required by law to report these payments in a form called 1099.

What is an IRS Tax Form 1099?

Form 1099 is an information form that you (as a business owner) are required to file with the Internal Revenue Service (IRS) to report payments made to someone who is not an employee of your business for which services were rendered.

This typically means any independent contractors and subcontractors that you hired during the tax year. As it pertains specifically to online businesses, think about payments made to individuals for search engine optimization (SEO) services, internet marketing assistance, content creation, ad hoc programming and tweaking, etc.

Why Are You Required to Comply with Form 1099 Reporting?

The IRS takes form 1099 reporting very seriously.  Because they allow you to claim business expenses as tax deductions when you file your income taxes, they want to make sure that they are taxing the individuals who should be claiming the same amount as income.

There is an exception to this filing requirement.  If you paid someone who is based overseas for services rendered to your business, you are not required to comply with form 1099 reporting (as of 2010) unless the work was performed within the USA.

For example, I fill out and distribute form 1099 for contractors I engage in my small business.  However, most of the work I outsource for my niche websites is conducted overseas by individuals and companies that are based outside the USA. Therefore I don’t file a 1099 for services rendered pertaining to my online businesses.

How Does the IRS Tax Form 1099 Work?

Anytime you engage another sole proprietor of self employed individual to render services for your business, you are required to note their taxpayer identification number or TIN.  Most of the time this is their social security number. If they have incorporated as a business, they can provide you with their employer identification number or EIN.

This information is typically provided in form W-9, another information form that is available on the IRS’s website at  All other tax related forms can be accessed on this website as well.

Keep a separate file for each contractor and retain all the relevant forms in it.  Keep track of how much you paid each contractor during the tax year.  At the end of the tax year, determine which contractors you paid at least $600 for services rendered so that you can comply with 1099 reporting for each.

The form 1099 has 3 copies. The law states that you are required to send one copy of this form to each contractor no later than January 31st of the year following the tax year in which services were rendered.  You are required to send one copy to the IRS (along with a 1096 transmittal form) and keep one for your personal records.  The IRS needs its copy by February 28.

Consequences for Non Compliance

No matter how small or large your business operation, the IRS takes tax compliance very seriously.  Failure to comply with 1099 reporting can lead to significant fines and penalties in the long run. Deliberately failing to file form 1099 can be even more damaging.

Not surprisingly, many small businesses, especially one-man run shops, often forget to file form 1099. However, everyone is treated the same by the IRS.  Non-compliance with tax law is not at all tolerated by the IRS.

Penalties for not filing or late filing IRS tax form 1099 increase with passage of time. Fines can range anywhere from $15 to $50 PER FORM not filed or incorrectly filed. The IRS recognizes that mistakes can be made.  Therefore if your 1099 reporting is incorrect but you correct it by August 1st of the year in which you file, there is a good chance the IRS will forgive the penalty.

In the rare cases that “intentional disregard” of the filing requirements can be proven by the IRS, the minimum penalty is $100 per 1099 form.  You can just imagine the amount of fines that can accrue for multiple violations over several years.

Concluding Thoughts

The US tax code can’t get any more convoluted and compliance requirements can’t be any more taxing. Sure, things can be simple for the minimalist who likes to keep life simple.  But if you want to get ahead in life, you will have to look forward to a complicated income tax return at some point.

A mentor of mine used to say that one of the signs of a highly financially successful individual is a complicated tax return and a heavy income tax bill. I agree with this. However, the more complicated one’s income tax return becomes, the more chances there are of overlooking important detail.

I am sure you are thinking there are a lot worst mistakes than failure to comply with IRS tax form 1099 reporting or filing one incorrectly.  However, consider that if you were audited by the IRS and are discovered to have had only 10 instances of neglect, you could face fines and penalties in the thousands of dollars.

The good news is that with a sincere approach, IRS fines and penalties can be appealed.  The IRS is made up of human beings like you and I who are reasonable individuals (for the most part). If you can demonstrate that you realize your mistake, have taken steps to rectify it and promise to continue to do so, there is a good chance you will get some leniency from them.

It’s never too late to comply with tax law, even if you have to go back and request retroactive forms from previous years. Don’t wait and get started today. And if you have to, get yourself an ethical CPA who is well versed in the line of business you are in to help you out.

Readers: Do you file 1099s for your business? Why or why not? Do you have any 1099 reporting stories of your own or someone you know that you can share with our readers?

Read Wiki’s material on IRS tax form 1099 reporting here.


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13 Responses to “IRS Tax Form 1099 Reporting is Mandatory for Your Online Business”

  1. jim syyap says:

    EVERYTHING is mandatory with the IRS, isn’t it. This is useful information. Thank you for sharing.

  2. Actually, not everyone is required to be given a 1099-MISC. All lawyers receive them regardless of organizational structure, but other than that, if a contractor is an incorporated entity (Corp, S-Corp, LLC) and they bill you for services you do not need to send them a 1099 no mater how much you paid them. It’s basically intended to prevent individuals from earning income on the side and not reporting it. This way, the IRS has something to match against their 1040 and can go after them for under-reporting income if they do.

    If you read the instructional publication for form 1099-MISC it will give detailed information as to the whos and whens to submit the form.

    • Sunil says:

      Eric, thanks for your comment.

      I believe there is a grey line here because you can pay a contractor for personal work (i.e. fix your bathroom) or pay them as a business for services performed for your business (i.e. web development).

      Few reasons for that, one which you already mentioned. First, if your business is to claim a income deduction, the IRS wants to ensure someone else is claiming that amount as income. Second, if someone is earning income, the IRS wants to ensure it knows, hence the 1099 reconciliation at year-end. For the contractor/worker, possessing a 1099 behooves them if they want to accrue work credits for social security purposes.

      There are some initiatives to ease the burden on businesses by relaxing the requirements to issue 1099 forms, but may of its specifics are still under works. If not required, how do you then suggest the objectives above are met?

      • The problem that the IRS was having was when they wanted to have businesses provide 1099s to ALL of their vendors, regardless of dollar threshold or business structure. That would have put a major strain on small businesses, which is why they pulled the plug.

        For as long as I’ve been in the business, no one has ever given a 1099 to a business entity that was incorporated because there is simply no reason to since they are considered an exempt entity. No individual has given a 1099 for any work done as far as I know, as none of it would be deductible with the exception of rental property.

        The thing that people miss is that under the current structure the income/expense matching is less accurate (and with the exception of audits, nonexistent) for businesses, but for individuals, it is still quite accurate. I have a bunch of clients who can attest to that as they tried to do their own returns and got contacted by the IRS for not reporting 1099 income from various forms.

        • Sunil says:

          Eric – are any of your clients business owners who hired outside services? If so do you recommend them not to issue 1099 forms? The fact that your clients were contacted for not reporting 1099 income signifies that someone out there (a business likely) issued a 1099 to the government showing that your clients earned income. Did I understand that right? And had they not reported due to the relaxed laws, the government would never have known that your clients made that income, correct?

          Another fact to consider…are your clients filing business activity as sole proprietors or some form of legal entity? And if the latter are they reporting their EINs? The language in the law is certainly more blurry for sole practitioners/owners as it specifically states “businesses” throughout.

          • Sunil-

            The clients that were contacted by the IRS were individuals who did get 1099-INTs and MISCs, but chose not to report them, thinking no one would ever know. This was before they came to me. So, yes, you understood that point correctly. The thing here, is that these were individuals, so there is no relaxed reporting procedure. All individuals & sole props require a 1099.

            I do have businesses who contract out jobs like repairs, and such. The only time they issue a 1099-MISC to the contractor (ie: plumber) is if the total of the services rendered >$600.00 AND the person is an individual, both scenarios have to be there. If the business hires a cleaning company that is incorporated in any manner, then they do not issue a 1099 for any amount.

            A sole proprietor is the business and vice versa. Since there was no incorporation of the business, there is no separate entity created, and therefore even with an EIN, the business is still part of the individual’s return and should follow individual tax laws. That’s the reason behind obtaining a W-9 form, to protect yourself and prove that you did due diligence in determining whether or not a 1099 should have been given.

            This is one of the reasons when I hate hearing people say that an accountant isn’t necessary and that they can do everything themselves. It’s not rocket science, but it can get very complicated and confusing for the novice to figure out, and it’s not an area where trial and error will benefit them.

  3. Laur says:

    Seems to me many home business owners do not know anything about filling in tax forms. Still this is business like any other and taxes should be paid, we owe it to our country.

    • Sunil says:

      It is indeed business. Many are genuinely not aware of all requirements. I am not making excuses on their behalf, but the complexity in the regulatory guidance is quite complex.

  4. Thanks for the article, and awesome information Eric! A soon as you become a Yakezie Member in 2012, we’re going to put you up in the Blogger Services page. You rock on the accounting front.

    I guess a couple clarification points for y’all:

    1) Let’s say I pay a contractor $700, but the contractor at some point in the year pays me $400. Does the IRS see this as a net payment to the contractor of $300, or since $700 was paid, one still issues a 1099 MISC for expense purposes?

    2) Eric, for your clients contacted by the IRS b/c they didn’t report the income from the 1099-MISC, would everything be OK if the entity reporting/sending the 1099-MISC DIDN’T send these documents as you say entities don’t need to do for incorporated entities?

    3) “If a contractor is an incorporated entity (Corp, S-Corp, LLC) and they bill you for services you do not need to send them a 1099 no mater how much you paid them.” I checked with my accountant, and he just mentioned S-Corp no need to issue 1099-MISC, but others yes, need to issue. However, he said the laws are always changing, so one should preferably send 1099-MISC for all income paid.

    4) If one has the manpower/money to issue/have someone issue and do the 1099-MISCs, might as well right? How much do accountants charge for each 1099-MISC?



    • Thanks Sam! I already read the post about signing up next month and I am definitely going to apply for membership as soon as the application goes live.

      1. Your only concern is how much you paid a particular vendor. There is no “netting” of any back and forth between the two. As far as the IRS is concerned the money you paid to the vendor is a reportable expense to you that is separate from any income you may earn off of them.

      2. Yes and no. They were individuals, so anything in excess of $600 that a company paid them needed to be reported. If they had been incorporated in any way and the payments were made to their business, then that is where the line is drawn for not needing to file a 1099 (unless it was for a lawyer, landlord, etc.) Also, and this is something that many people either do not know or understand fully, it doesn’t really matter if a vendor/contractor has an incorporated company–if payments are made to their legal, individual name then a 1099 is still required because the money was paid the individual and not the company.

      3. An LLC is a tricky issue since some are reported on the member’s 1040 Schedule C if they bypassed the option to be taxed as an S-Corp. That is why it is important to obtain a W-9 from anyone you do business with so you know what you need to do at the end of the year. When in doubt, file a 1099, and if it is brought to light that it isn’t required, it won’t matter anyway.

      4. It’s always better to do a little too much than too little. You always want to cover your ass and put the burden on others to do the right thing. As long as you are following the law, you will have nothing to worry about. Rates vary by professional and often times the number of 1099s that will be issued and the amount of time involved could play a part in the fees charged.

      • Eric,

        Excellent thoughts! I will re-read your comments another several times to fully comprehend everything.

        Bottom line seems to be get W-9s and issue 1099s for any long term business partners that are at $600 or more. Better to do more than less.

        And, I want to ad, those who don’t have an accountant need to hire you and your services!

        You should think about crafting a particular blogging/online entrepreneur taxes services package and brand it as such. We’ll link it on the Yakezie Blogger Services page no problem.

        Eric’s Blogger Tax Solution Package For $XYZ
        * Taxation optimization advice for bloggers
        * Requesting W-9s and filing 1099s
        * Filing returns
        * And so forth

        You will rock this niche as anybody who reads your advice on taxes will recognize you are very helpful and know yourself.



  5. Sunil says:

    Great discussion and clarification guys. Couple points to add:

    1) This post/article was written from the perspective of someone making money online (operating as a business) engaging mostly freelancers/contractors who are generally sole proprietors by default. Thank you for clarifying the nuance on engaging registered businesses.

    2) To Sam’s point, when in doubt file a 1099 anyway. “However, he said the laws are always changing, so one should preferably send 1099-MISC for all income paid.”

    3) DISCLAIMER: Readers must not construe the information on this post and the subsequent discussion as legal/tax advice. Please consult your attorney/accountant for guidance that applies to your unique situation.

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