Form 1099, like many other tax forms, is meant to encourage people to report all of their income so the IRS can collect the full amount of taxes it is owed, or, as the IRS puts it, “to increase voluntary compliance and improve collections.” That's why form 1099 is technically called an “information return”.
When does my business need to send a 1099? Here is a very general list:
1. Payments to other businesses or individuals for services performed of $600 or more (1099-MISC)
2. Interest on a business debt to someone (1099-INT)
3. Dividends paid (1099-DIV)
4. Distribution from a retirement or profit plan or from an IRA or insurance contract (1099-R)
5. Payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third party network transaction (1099-K)
The one most common among our clients is the 1099-MISC for services of $600 and greater.
Our accountants spend an incredible amount of time at the beginning of each year analyzing the general ledgers of each client to determine if payments to vendors require a 1099.
It’s important to keep our clients compliant and out of any situation that could cause them an unnecessary penalty. If you use a separate bookkeeper, tax preparer and payroll provider be sure one of them is tasked with preparing 1099’s for your business.
In our “Total Accounting Package” for businesses, we charge a small fee for the analysis, preparation and submission of both 1099 and W-2 forms, removing the burden from you.
It’s very rare that a business does not pay for services during the course of year exceeding the thresholds explained above and therefore requiring 1099s to be submitted. However, the majority of new clients we have onboarded over the past year failed to comply with the requirements in prior years.
Penalties for not reporting 1099s properly generally vary from $50 to $270 per form depending on how delinquent. If a company intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $550 per statement. The maximum penalty is a total of $1,113,000* for small businesses. In all cases, the IRS considers you to be a small business if you’ve earned an average of $5 million or less in annual revenue for the past three tax years.
For more information visit www.irs.gov or contact our office to speak to a tax advisor.