The Internal Revenue Service (IRS) has been in the process of bolstering the 1099 reporting standards for everyone, including independent contractors and those who report cancellation of debt, and the bureau isn’t showing signs of slowing down.
One of the first indications of the 1099 crackdown was the creation of the 1099-K form in 2011 that reports credit card sales made by a company and is required to be filed by the credit card processor. A more recent indicator is the increase in penalties for businesses that are late or otherwise not filing 1099s. Prior to 2016, the penalty for late filing a 1099-MISC to an independent contractor ranged from $30 to $250 per return. In 2019, these penalties now range from $50 to $540 per return not filed. That is a significant increase! (Learn more about the associated IRS penalties here.)
In order to avoid these penalties, it’s essential that your company put a process in place to indicate when a vendor is required to receive a 1099. Let’s go through the entire process of 1099 reporting and figure out when it’s required to send them out.
When to file 1099-MISC?
For the time being, and we will go over more information on the future of 1099s later, a 1099-MISC is the most important of the 1099 forms most small businesses are required to file, so we will focus on this form. To determine whether a 1099-MISC is required to be filed, let’s first look at the list of reporting requirements directly from the IRS:
- Minimum $10 in royalties paid in current year
- Payments of $600 or more in the following areas:
- Services performed by someone who is not your employee
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Generally, the cash paid from a notional principal contract to an individual, partnership or estate
- Payments to an attorney
- Any fishing boat proceeds
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
As you can see, there are many 1099-MISC reporting requirements that a business owner must take into consideration.
In the pest and lawn care industries, the most common 1099s filed are for rents paid, services performed by someone who is not your employee and payments to an attorney.
Employee or independent contractor?
As outlined by the IRS, services performed by someone who is not your employee is grounds for issuing a 1099-MISC. It’s extremely important that before you issue a 1099 to someone providing services to your company, you must determine if they are an employee or indeed an independent contractor. In general, to be considered an independent contractor and be issued a 1099, the payer (your business) can only dictate the end result of a project and not what and how the project will get done. In order to aid in making the decision, there are three main categories that help distinguish the difference:
- Behavioral control: A hired individual is considered an employee if your company can control the work performed. Examples of this include controlling when and where to work, detailed instructions to perform a task, evaluating the details of how the work is done and providing on-the-job training are indicators that a hired individual is an employee and is NOT be required to receive a 1099.
- Financial control: The right question is to ask whether or not your business has the ability to direct the financial aspects of the job at hand. Financial control examples that would indicate a worker is an independent contractor and WOULD BE required to receive a 1099 include providing his or her own equipment/supplies, incurred unreimbursed expenses, the ability to seek out other business opportunities and negotiating a flat fee for the job as opposed to a regular wage at set intervals.
- Relationship: Employee indicators include your business providing benefits such as health and retirement, the expectation that the relationship will continue indefinitely and when services provided are seen as key activities within the business. Independent contractor indicators include written contracts and when the length of a relationship is only for a specific project.
The reason this is such an important piece of the 1099 process is because if you are improperly filing 1099s to workers that should be treated as employees, you may be “skirting” employer portion payroll taxes and it could create tax penalties and headaches with the Department of Labor because of overtime pay issues. If you have any concerns about classifying a worker, please see below to obtain our 1099 checklist that will help with the determination.
1099-MISC filing exceptions
While there are many guidelines when it comes to filing a 1099, there are some cases that allow an exception from being required to file a 1099. For example, when the potential recipient of a 1099-MISC is incorporated, which means they are either treated as an S-Corporation or a C-Corporation, a 1099 is NOT required to be filed. This rule even applies to LLCs that are being treated as an S-Corporation. The only time this exception does not stand is when the corporation is being paid by your company for legal or medical services.
1099-MISC filing deadlines
Below are the important dates for filing forms 1099-MISC. It’s critical that your accountant is able to get December of the prior year wrapped up quickly to have accurate filings. Form 8809 can be filed to be granted a 30-day extension for filing.
- January 31 of the following year when you’re reporting nonemployee compensation payments in Box 7 (paper and electronic);
- The last day of February of the following year if filing by paper when you’re NOT reporting nonemployee compensation in Box 7; or
- March 31 if filing electronically when you’re NOT reporting nonemployee compensation in Box 7.
The future of 1099 reporting
As mentioned earlier in this article, the future of 1099-reporting is changing, and the rules have already changed for 2020. The introduction of form 1099-NEC for nonemployee compensation will replace the filing of 1099-MISC for independent contractors, reporting miscellaneous income, payments to attorneys and cash payments made for the purchase of fish. This form is still in the development stage so please look out for future updates regarding this new form.
The 1099 checklist
It may seem like a time-consuming process to determine whether or not a 1099 is required to be filed, but please use the link below to our General Requirements and Compliance Checklist to aid in the process.
Brian Post is a CPA and Partner of PCO Bookkeepers
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