When do you need a 1099 and why?

The 1099 form, as shown on the laptop, is due to the IRS by Jan. 31.

By Shelley Widhalm

With the arrival of each New Year soon approaches the deadline for 1099s—the form is due to the IRS by Jan. 31.

“Most people don’t realize the deadline is right around the corner,” said Debbi Allison, owner of Open Book Consulting in Loveland and an advanced certified QuickBooks Online ProAdvisor.

The 1099 form is used to report income and is different from a W-2, issued by employers to report employee salary and tax information. The most common 1099 is the 1099-MISC, designated for independent contractors to report income received from contract or freelance work.

The Required Forms

Contractors need to submit a W-9 to any business where they do contract work. The form should include their name, address, business type and Social Security or tax identification number in order to be complete. Businesses, as well as nonprofits, use the W-9 if they pay a contractor $600 or more a year, but those who are self-employed need to report self-employment income if the amount from all sources is $400 or more.

Allison recommends contractors obtain a tax identification number, available from irs.gov for free, after applying with the Secretary of State as a Limited Liability Company, or LLC. If applying before creating your LLC, a special letter to the IRS requesting a change to the business’s organizational type will be required after you form your LLC or incorporate your business.

“That way when you’re handing out your W-9, you’re not handing out your Social Security Number,” Allison said. “That’s pretty sensitive information this day and age.”

Businesses that pay subcontractors are responsible for collecting the W-9 in order to determine if the subcontractors are incorporated, a LLC or a sole proprietor. A verbal confirmation is not valid proof of due diligence, and the burden of proof is on the business.

“If the subcontractor is incorporated, you don’t have to issue a 1099. If they are not, you need to,” Allison said.

Using QuickBooks

Businesses issuing 1099s calculate how much they paid their contractors over the year. QuickBooks will compile that information if it has been entered properly. Businesses can E-File using QuickBooks or a service like tax1099.com, or hire a tax preparer or bookkeeper to do the filing.

“The rules get complex. That’s why I recommend a tax preparer or bookkeeper to help you with your 1099s,” Allison said. “There are different scenarios, different types of payments and threshold limits.”

The $600 threshold is a general guideline for filing the 1099, but there are special cases to that rule, Allison said.

“Filling out the form, like filling out any tax form, can be a bit overwhelming and intimidating,” Allison said. “The instructions are in IRS verbiage and very complex.”

If the form is not filed by Jan. 31, there may be penalties and fees.

“Doing 1099s on time and making sure they’re accurate and having all the supporting documents you need will save you a lot of headaches and fees later on,” Allison said.

Shelley Widhalm is a freelance writer and editor and founder of Shell’s Ink Services, a writing and editing service based in Loveland, Colo. She has more than 15 years of experience in communications and holds a master of arts degree in English from Colorado State University. She can be reached at shellsinkservices.com or swidhalm@shellsinkservices.com.

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