Who must send 1099s and who should get them

Patti Spencer

If you are in business, whether self-employed or running a company, you must send a 1099 form (with copies to the IRS) to anyone that you pay money to, unless the payments meet one or more of the following exceptions:

n The recipient is a corporation.

n You included the payment in a W-2 form (to an employee).

n The payment is for a tangible product (office supplies, computers, etc).

n The total payments during the calendar year were less than $600.

To make sure that you are reporting the payment item correctly, you should ask the individual or other payee to fill out a Form W-9, Request for Taxpayer Identification Number and Certification, complete with name, address and social security number or taxpayer identification number.

It is recommended that you get the completed W-9 before you make the payment. If you pay someone and they refuse to give you a W-9 or their social security number, you should file the 1099 without the number. The IRS will be in contact with them, and they can explain to the IRS why they won't provide their social security number.

Individuals are not required to send 1099-MISC for personal payments. You are not required to send a 1099-MISC to an independent contractor to whom you made a personal payment unrelated to a trade or business. For example, you don't have to issue a 1099-MISC to your landscaper or house painter.

The IRS started its 1099 information return program in the 1980s. Its purpose is to make it harder for people to work "under the table."

The 1099s allow the IRS to run a matching program using social security numbers and tax ID numbers to catch people who receive interest or dividends, receive payment for services, or collect rents but don't report the income.

Most tax practitioners will agree that of all the enforcement programs the IRS has, the 1099 matching program works pretty well.

There are a number of 1099s through which businesses of all kinds report the money they pay, including 1099-INT for interest income, 1099-DIV for dividends and several other 1099 forms to report other specific monetary transactions. 1099-MISCs are used to report freelance or self-employment income, rental income, prizes and other miscellaneous types of income.

Individual taxpayers are most familiar with a 1099-MISC being used by a trade or business to report payments of $600 or more for services performed by people not treated as employees (such as subcontractors).

If you work as an independent contractor, freelancer or consultant, you receive a 1099-MISC reporting what was paid to you from each payor during the calendar year. If you received a 1099, the IRS received a copy of it.

Your 1099-MISC income should be reported under schedule C or C-EZ and SE for Self Employment, as part of your regular 1040. Not only do you owe income tax on these earnings, you also owe self-employment tax.

Say you have someone who does graphic design for your firm on an occasional basis. Did you pay her more than $600 in 2012? If so, you must give her a 1099-MISC and send a copy of the 1099 to the IRS with transmittal form 1096.

Form 1099-MISCs now must be sent to landlords. This means that even small sole proprietors are required to send landlords 1099-MISCs in order to deduct office rent.

1099-MISCs are issued to individuals, estates, partnerships, single-member LLCs and LLCs treated as partnerships. Corporations and LLCs treated as an association and taxed as a corporation generally are not issued 1099-MISCs. Payments to corporations are included only if they are for medical, health care, legal or fishing activities.

IRS regulations require that attorneys always receive 1099s from payers engaged in a trade or business, regardless of the manner in which they do business. (Isn't it funny that lawyers, alone, of all other professions are singled out for this special reporting?)

You must send the 1099-MISC by Jan. 31 for the preceding year. Use Form 1096 to transmit copies of the 1099s you issue to the IRS.

What happens if you don't send a1099-MISC? You could lose the deduction and owe the IRS a $50 penalty for each 1099 form you didn't file. Depending on the extent of the failure and the reasons, some have been liable for tax-fraud.

Patti@spencerlawfirm.com