Your Business and 1099s: What You Need to Know
If you’ve ever worked as a contractor or vendor, you’re familiar with 1099s. But what’s your responsibility when it comes to these IRS reporting forms now that you’re running a business?
There are more than 30 types of 1099 forms outlined by the IRS, and many cover extremely specific transactions. But the 1099-MISC form is one businesses use to report non-employee payments to contractors and freelancers for services and other types of payments made during a calendar year.
Whether you need to report payments and issue a 1099-Misc depends on several factors, not just the amount you paid. Other factors include who you paid, the type of service you purchased and how you made payment.
Just as its name indicates (in the abbreviated “miscellaneous”), the 1099-MISC form covers many types of payments your business may make during the year.
Some of the payments that need to be reported on this form are those you made for services performed for your business, including parts and materials, as well as lawyer fees, and payments made for prizes and awards, royalties, rents and broker payments.
According to the IRS instructions, if you are required to file Form 1099-MISC, you must also furnish a copy to the contractor or vendor.
If you pay independent contractors, the IRS provides these four conditions to generally determine whether you need to file Form 1099-MISC:
- You made the payment to someone who is not your employee;
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
- You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
- You made payments to the payee of at least $600 during the year.
You need to file Form 1099-MISC for each person you paid during the year in the course of “your trade or business.”
“You are engaged in a ‘trade or business' if you operate for gain or profit,” the IRS explains in the 1099-Misc instructions. “However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.”
The IRS uses the $600 or more guideline for payments you made to nonemployees for rent (there are exceptions), and for services performed by someone who is not your employee, including for parts and materials, and for prizes and awards.
Interestingly enough it also applies to cash payments your business made for fish or “other aquatic life” you purchased from anyone engaged in the trade or business of catching fish, and any fishing boat proceeds. There are a number of other reportable types of payments, and the list is long enough and complex enough to show that if your business engages a lot of contractors or vendors you’ll be well-served to have a professional tax adviser or accountant help you prepare the needed 1099s.
Generally speaking, the Form 1099-MISC covers payments totaling $600 or more made to individuals and most business entities in compensation for services rendered to your business.
So, if you paid an individual or business more than $600 during the calendar year, the IRS says, you’ll need to report it on a 1099-MISC form and provide a copy to the contractor or vendor.