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.
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.
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.
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 www.irs.gov. 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.
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.
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.